Key Takeaways:
U.S. Treasury yields slid on June 2 as investors priced in growing prospects for a ceasefire in the Middle East, reversing part of the war-driven spike that pushed borrowing costs to multi-month highs.
The 10-year U.S. Treasury note fell 23 basis points to 4.44%, according to Tradeweb data, after touching 4.67% in mid-May — the highest level since the US-Israeli war against Iran began in late February. The move marked the largest single-day decline in the benchmark yield in three weeks as diplomatic signals from the region pointed to progress in ceasefire negotiations.
"The bond market is pricing in a material de-escalation scenario, which would remove the energy-price risk premium that has been embedded in longer-dated yields since the conflict began," said Frederic Neumann, chief Asia economist at HSBC. "If a ceasefire is reached, we could see a sharp reversal in the yield curve as safe-haven demand rotates back into risk assets."
The yield decline reflected a broader flight to safety that also pushed gold up $28 to $2,365 an ounce, while the dollar index eased 0.3% to 103.8. The S&P 500 rose 0.9% on the session as energy and defense sectors lagged, with the VIX falling 1.8 points to 18.4 — below its trailing one-year average of 21.2.
Foreign holdings of U.S. Treasurys fell by $138.4 billion in March, a 1.5% decline from the previous month, as central banks adjusted portfolios to buffer against energy-price shocks.
Japan, the largest foreign holder of U.S. government debt, reduced its Treasury holdings by about $47 billion to $1.19 trillion, according to data from the Treasury International Capital System. India sold $7.6 billion in Treasurys, while Canada reduced its holdings by $6.9 billion and the United Arab Emirates by $5.8 billion. The United Kingdom bucked the trend, increasing its holdings by $29.6 billion to $926.9 billion.
Goldman Sachs said in a May 27 note that the selling wave was consistent with historical reserve-management practices by central banks and did not signal a structural shift away from dollar assets. "Given increased financial volatility since the start of the war in the Gulf, and resultant pressure on exchange rates, especially in Asia, it is not a surprise that US Treasury holdings by central banks have fallen," Neumann said.
Borrowing costs remain elevated despite the recent pullback, with the 10-year yield still 49 basis points above its pre-war level of 3.95% in late February.
The war-driven energy price spike has seeped into the cost of funding the U.S. government, with the national debt servicing cost tripling since 2021 to more than $1 trillion annually, according to Jessica Riedl, a budget and tax fellow at the Brookings Institution. Average mortgage rates have climbed to their highest levels in nine months, while auto sales have slumped as higher financing costs weigh on consumer demand.
Glenn Hubbard, a former chairman of the White House Council of Economic Advisers under President George W. Bush, said the U.S. may no longer have the same borrowing capacity to combat a future economic crisis. "I don't think we have the space that we had in 2008 or 2020 to deal with it," said Hubbard, now a professor at Columbia University's Business School.
The last time the 10-year yield fell more than 20 basis points in a single session was in April 2025, when the U.S. and China agreed to a temporary tariff truce. That move was followed by a 3.2% rally in the S&P 500 over the following two weeks as risk appetite returned.
If a ceasefire is reached, economists expect the 10-year yield could fall toward 4.10% as the energy-risk premium dissipates, though persistent fiscal deficits — projected to surpass $4 trillion annually within a decade under current policies — may limit the scope for a sustained decline.
This article is for informational purposes only and does not constitute investment advice.
