- Reports revealed that the US and Israel are planning a heavy attack on Iran after the US midterm elections.
- Investors moved from equities to bonds as questions rose about the sustainability of the AI boom.
- Traders are now eagerly awaiting the FOMC policy meeting.
Interest futures rallied on Thursday as Treasury yields collapsed amid a surge in demand for safe-haven assets. Market participants scrambled for safety in bonds due to geopolitical risks and a decline in the US tech sector. Investors are now looking ahead to next week’s FOMC policy meeting, which will shape the outlook for rate hikes.
Tensions between the Houthis and Saudi Arabia have kept oil prices elevated in recent weeks. Meanwhile, the pause it attacks between the US and Iran has kept prices from rising too much. However, reports revealed that the US and Israel are planning a heavy attack on Iran after the US midterm elections in November.
The likelihood of an escalation in the conflict between the two nations could push oil prices higher, rekindling inflation worries. Ideally, such an outcome would increase expectations for a Fed rate hike, boosting yields. However, in the short term, the Fed has already committed to one more hike in December.
Nevertheless, a prolonged war and higher oil prices could force the Fed to assume a more aggressive stance on hikes in 2027.
US 10-year yield (Source: Bloomberg)
Meanwhile, traders moved from equities to bonds as questions rose about the sustainability of the AI boom. Experts raised concerns about the amount of capital needed in AI development, which was currently scarce. Furthermore, the prospects of higher borrowing costs could worsen the situation and send tech companies tumbling.
“For the first time in a while, Treasuries are enjoying haven status,” said Larry Holzenthaler, senior portfolio manager for fixed income at Catalyst Funds. “You have weakness in tech, an escalation of risk in the Middle East and higher oil. On a relative basis, Treasuries start to look like a safe place to hide again in the short term.”
Traders are now eagerly awaiting the FOMC policy meeting due next week for more clues on the 2027 outlook. A hawkish message during the meeting could send interest futures lower. On the other hand, a cautious tone would boost the current rally.
At the same time, the US will release its core PCE price index report, showing the state of underlying inflation. Policymakers use this report to guide future policy moves.
