U.S.-Iran agreement triggers broad price rally

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The long-awaited U.S.-Iran agreement to reopen the Strait of Hormuz has gone into effect. This is intended to bring the war in Iran to a temporary end. A lasting solution, however, depends on the success of the upcoming round of negotiations, which will focus above all on Iran's nuclear program.
• At its first meeting under Kevin Warsh, the Fed once again left its target range for the federal funds rate unchanged at 3.50% to 3.75%. The new “dot plot” shows a sharply divided view on the future course of monetary policy. About half of the central bankers favor raising interest rates in the second half of the year.
• The Bank of Japan raised its key interest rate from 0.75% to 1.00% and reaffirmed its commitment to the continued gradual normalization of monetary policy. In the United Kingdom and Switzerland, however, key interest rates have remained unchanged once again.
• U.S. retail sales rose more than expected once again in May. This remains true even when excluding the volatile sales of cars and gasoline.
• British inflation remained stable in May, thus being tamer than expected.
• The latest auction of 20-year U.S. Treasury bonds saw clearly aboveaverage demand.

What could drive the market next week?

• Barring any new bad news from the Middle East, financial market participants could now shift their focus back to other topics and macroeconomic data.
• The ECB is releasing its latest survey on consumers’ inflation expectations.
• The most closely watched leading indicators for June from the eurozone – the HCOB Purchasing Managers' Indices and the ifo Business Climate Index – are set to be released. Is the easing of tensions in the Middle East already having a positive effect on sentiment?
• In the U.S., core PCE inflation is set to rise to its highest level since October 2023.
• In the primary market for U.S. Treasury bonds, the focus next week will be on short- to medium-term maturities. Meanwhile, activity in the primary market for euro-denominated government bonds may slow modestly compared with last week. We expect gross supply of just under 25 billion EUR, following well over 30 billion EUR the previous week. Reflows of a similar magnitude will temporarily create a certain balance in cash flows before net cash flows are likely to slip back deep into negative territory in early July.

Elmar Völker, Senior Fixed Income Analyst