Why are US Treasury yields falling as Iran deal hopes push WTI lower?

US 10-year Treasury yield retreats to 5.123%, down nearly two basis points.
WTI slips to $97.58 as reports on US-Iran negotiations send mixed signals.
Pending Home Sales drop 7.3%, with higher mortgage rates weighing on demand.

US Treasury yields eased on Tuesday amid mixed reports on progress towards a US-Iran agreement. While one report suggested Washington and Tehran could be close to a deal, another said negotiations remained under way and an agreement had not yet been finalised.

Are diplomatic hopes and weak housing data pulling US 10-year yields towards 5.12%?

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

A rebound in US equities put downward pressure on US bond yields. The benchmark 10-year Treasury yield fell nearly 2 basis points to 5.123%, having initially declined as geopolitical developments drove energy prices lower. US crude oil benchmark West Texas Intermediate (WTI) is down 0.67% at $97.58 per barrel.

At 101.66, the US Dollar Index (DXY) has shed 0.32%. The index tracks the dollar against a basket of peer currencies.

Higher mortgage rates were blamed for September's -7.3% reading in US Pending Home Sales, which fell short of the -0.5% estimate. Next on the US economic calendar are Initial Jobless Claims on 22 October, followed by the S&P Global Flash PMIs on 23 October.

At 4.789%, the US 2-year Treasury yield remains unchanged. This maturity is the most sensitive to interest rate expectations.

Money markets have priced in no change in interest rates at the Federal Reserve's October meeting. For December's meeting, however, the probability remains at 89%, according to Prime Terminal.

Daily chart: US 10-year Treasury note yield

Common questions on interest rates

How do interest rates work?

Borrowers pay interest to financial institutions on their loans, while savers and depositors receive interest on their funds. These rates are influenced by base lending rates, which central banks adjust in response to economic developments. Maintaining price stability is normally part of a central bank's mandate; in most cases, this involves targeting core inflation of around 2%. When inflation is below target, a central bank may lower base lending rates to encourage borrowing and support economic activity. By contrast, inflation substantially above 2% typically prompts an increase in base lending rates to bring price growth down.

Why do interest rates affect currencies?

A country's currency generally gains support from higher interest rates, as the country becomes a more attractive destination for global investors' funds.

Why does Gold respond to changes in interest rates?

Holding Gold carries a higher opportunity cost when interest rates rise, compared with investing in an interest-bearing asset or keeping money in a bank. Higher rates therefore generally put pressure on Gold prices. High interest rates also tend to strengthen the US Dollar (USD). As Gold is priced in Dollars, a stronger dollar has the effect of reducing its price.

How is the Fed funds rate set and tracked?

US banks lend to one another overnight at the Fed funds rate. Set by the Federal Reserve at its FOMC meetings, this is the headline rate frequently cited in reports. The rate is specified as a range, such as 4.75%-5.00%, but the figure quoted is the upper bound, or 5.00% in this example. The CME FedWatch tool tracks market expectations for the future Fed funds rate. These expectations influence the behaviour of many financial markets as they anticipate the Federal Reserve's upcoming monetary policy decisions.