Global government bond markets rallied across the board on Wednesday as US President Trump hinted the Iran conflict could conclude within weeks, prompting a sharp fall in oil prices and a swift repricing of rate hike expectations. Concerns over the energy crisis that have troubled global markets for a month showed clear signs of easing.
Yields on UK government bonds and sovereign debt from Eurozone countries like France and Italy each fell by over 10 basis points. Germany's 10-year benchmark bond yield dropped 6 basis points to 2.94%, its lowest level since March 18. Concurrently, US 2-year and 10-year Treasury yields fell by up to 6 basis points each, to 3.73% and 4.26% respectively. Japan's 40-year government bond yield decreased by 12 basis points to 3.795%.
<img src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/09c8f350-db6d-4a72-b06a-73137d7a1e67.png?x-oss-process=image/auto-orient,1/interlace,1/resize,w_1440,h_1440/quality,q_95/format,jpg" alt="" original-src="https://imageproxy.pbkrs.com/https://wpimg-wscn.awtmt.com/09c8f350-db6d-4a72-b06a-73137d7a1e67.png"/>
According to Xinhua News Agency, US President Trump stated on the evening of March 31 at the White House that the US would end hostilities in Iran within &#34;two to three weeks,&#34; potentially reaching an agreement with Iran before then. CCTV News also reported that Iranian President Rouhani indicated Iran was willing to end the war, provided its demands were met, especially assurances against further aggression. Trump's statement rekindled market optimism for a de-escalation of the situation.
Market bets on interest rate hikes subsequently retreated rapidly. The probability of the European Central Bank hiking rates in April has fallen below 50%, and the Bank of England's rate hike probability has dropped to about one-third. The spot dollar index fell by as much as 0.4%, as the substantial long dollar positions built up due to the Iran conflict began to unwind.
<h2>Rate Hike Expectations Cool Significantly</h2>
The easing of the Iran situation directly impacted market assessments of central banks' monetary policy paths. For the full year, markets are currently pricing in cumulative rate hikes of approximately 60 basis points for the European Central Bank and 43 basis points for the Bank of England, both the lowest levels since mid-last month.
Following the outbreak of the Iran conflict, severe disruptions to energy exports from the Middle East led to a sharp rise in inflation expectations, causing markets to heavily bet on continued rate hikes by the ECB and the Bank of England. This reversal of expectations indicates that bond investors are reallocating positions in anticipation of potential policy shifts.
The US Treasury market also benefited simultaneously. The Bloomberg US Government Bond Total Return Index fell 1.7% in March, marking its largest monthly decline since the end of 2024. The recent pullback in yields signifies a notable shift in market sentiment.
Kenta Inoue, a senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo, commented, &#34;For Trump, given his declining approval ratings and escalating risks, he cannot afford the cost of a protracted conflict.&#34; He anticipates that as energy crisis concerns dissipate, &#34;the short end of the yield curve is likely to decline to reflect expectations of Fed rate cuts, while the long end may struggle to rise further.&#34;
<h2>Uncertainty Remains, Markets Cautious</h2>
Since the outbreak of the Iran conflict, the US dollar has been the biggest beneficiary in the foreign exchange market, becoming one of the most heavily accumulated long positions. As expectations of an end to the war rise, this trading logic faces challenges.
Valentin Marinov, Head of G-10 Foreign Exchange Research and Strategy at Crédit Agricole CIB, stated, &#34;The dollar stood out in the Iran conflict as the largest long position in the FX market, and we are now seeing some unwinding of these long positions.&#34;
Despite the clear improvement in market sentiment, analysts caution that many uncertainties remain to be clarified. A team of strategists at ING, including Benjamin Schroeder, noted in a research report:
<blockquote>
&#34;Following news regarding communication between the warring parties, the market will closely watch whether this can pave a path towards de-escalation.&#34;
</blockquote>
The team also raised a key question: &#34;Given the damage already inflicted by the war, how quickly energy flows can be fully restored remains an open question.&#34; This implies that even if a ceasefire agreement is reached, the normalization of the energy market may still take time, and inflationary pressures may not dissipate quickly.
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Positive signs emerged in the US-Iran ceasefire negotiations, rapidly diminishing geopolitical risk premiums. Coupled with expectations of falling energy prices, US stock rose across the board in trading on April 1st. Market sentiment shifted from risk aversion to risk-on, with technology and cyclical stocks poised to lead the gains.

Positive signs emerged in the US-Iran ceasefire negotiations, rapidly diminishing geopolitical risk premiums. Coupled with expectations of falling energy prices, US stock rose across the board in trading on April 1st. Market sentiment shifted from risk aversion to risk-on, with technology and cyclical stocks poised to lead the gains.

Market rebound driven by expectations of a US-Iran ceasefire!

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Global bond markets rallied across the board as US President Trump hinted the Iran conflict could end within weeks, leading to a sharp decline in oil prices. Yields on UK, Eurozone, and US government bonds all fell, significantly dampening market expectations for interest rate hikes. Probabilities for rate hikes by the European Central Bank and the Bank of England dropped below 50%, and the spot dollar index weakened. The shift in market sentiment sees bond investors reallocating positions, reflecting expectations of a policy pivot

- Following President Trump's suggestion that the Iran conflict may conclude within weeks, global bond markets strengthened significantly, while oil prices fell sharply.  
- The yields on government bonds in the UK and several Eurozone countries dropped over 10 basis points, with the German 10-year yield falling to 2.94%, a three-week low.  
- Market expectations for interest rate hikes diminished as optimism grew regarding a potential resolution, though uncertainties remain about the timeline for restoring normal energy flows post-conflict.

US, European, and Japanese Government Bonds Rally Across the Board as Market Speculates Iran Conflict May End Soon