Oil Prices Drop 5% Easing Rate Hike Expectations, U.S. Treasury Yields Fall Across the Board
N.R. Finch
WTI crude tumbled roughly 5% on Tuesday after U.S.–Iran diplomacy signalled progress, pulling Treasury yields down 3–4 basis points — the 10-year fell to 4.64% — and slashing the market's year-end rate-hike pricing from two hikes to one, with the September meeting now the pivotal unknown.
Why did oil drop 5% in a single session?
WTI futures fell about 5% on Tuesday, hitting their lowest since July 13.
The trigger: U.S. Treasury Secretary Scott Bessent and Qatari representatives signalled that the U.S. and Iran are close to a deal — the latest in a string of similar remarks since the U.S. launched military action against Iran in late February.
This means → if an agreement materialises, the war-driven risk premium baked into crude will deflate, leaving room for further declines.
How does an oil drop travel into the bond market?
Since the U.S.–Iran war began, oil and Treasury yields have moved in tandem: oil up → inflation expectations up → rate-hike bets rise → yields climb. The reverse also holds.
Tuesday's oil plunge eased inflation fears. The 10-year yield fell to 4.64%; the 2-year hit its lowest since July 21.
In plain terms = oil acts like a rope tying inflation expectations to rate-hike bets. When the rope loosens, bond prices rise.
How much have rate-hike expectations shrunk?
Short-end rate futures now price about 15 basis points of tightening at the September meeting — less than two-thirds of a standard 25 bp hike.
Just last week, markets fully priced two hikes by year-end; that has collapsed to one — a sharp recalibration.
Philadelphia Fed President Anna Paulson published an essay Tuesday saying she remains "open-minded" on the policy path, endorsing neither a hike nor a pause.
This reflects a lack of consensus inside the Fed itself on whether rates are already restrictive enough — officials are waiting for more data.
Can the rally last? Two variables to watch
Variable one: Friday's July non-farm payrolls report. Even with oil lower, a strong U.S. economy may still demand higher rates. Tuesday's June JOLTS data showed a larger-than-expected drop in job openings, but the market barely reacted.
Variable two: Wednesday's Treasury quarterly refunding statement. The Treasury has signalled larger auction sizes in coming quarters. Dealers expect no formal increase announcement this round, but any shift in language could push long-end yields higher.
This means → oil has only relieved the inflation side of the pressure. If jobs data run hot or supply expectations are revised up, yields can reverse course quickly.
Content is for reference only, not financial advice.