The fall in oil prices is driving the rebound in US bonds, but high energy costs still suppress market expectations of interest rate cuts.

With the international oil prices falling from recent highs, the prices of US Treasury bonds have rebounded. The fall in oil prices has relieved the market's concerns about energy prices driving inflation, but overall, prices remain at a relatively high level, causing investors to worry that high energy costs could drag down economic growth. This round of bond market gains has led to a decrease in yields for various maturities of US Treasury bonds by about 3 to 5 basis points, basically erasing most of the gains from last Friday. At that time, US benchmark crude oil futures closed near $100 per barrel, reaching the highest level since mid-2022. When the Asian markets opened on Monday, oil prices briefly exceeded this level, then fell back to around $95. Although rising energy prices may suppress economic growth, the direct impact on inflation continues to be evident. US retail gasoline prices have risen from less than $3 per gallon before the US strikes against Iran on February 28 to around $3.7 currently. The rise in oil prices has weakened market expectations for a Fed rate cut, which would typically benefit US Treasury bonds, thus reducing the attractiveness of bonds to some extent. Gennadiy Goldberg, head of US rate strategy at TD Securities, said: "With oil prices remaining at relatively high levels and risk assets starting to rebound, the US Treasury market seems to be showing some initial signs of stability. The adjustment to market expectations for rate cuts last week was quite dramatic, and this week, the stabilizing oil prices may prompt investors to pull back some of the excessive repricing." The trend in the US Treasury market is also in line with the European bond market. On Monday, the yield on UK 10-year government bonds fell to 4.74%, with most euro area government bond yields also declining. Meanwhile, Federal Reserve officials will hold a policy meeting this week, the first meeting since pausing rate cuts in January. The market widely expects the Fed to maintain the federal funds rate target range at 3.5% to 3.75%. Currently, traders still expect a 25 basis point rate cut by the Fed before the end of the year, but prior to the sharp rise in oil prices, the market generally expected two rate cuts this year. Due to the impact of the spike in oil prices, several Wall Street institutions that previously predicted a rate cut in June, including Barclays, Goldman Sachs, and TD Securities, have pushed back their rate cut expectations to September. Last week, US Treasury yields rose to their highest levels since early February, with short-term bond yields, which are most sensitive to rate policy, showing particularly significant increases. The 2-year Treasury yield briefly surpassed 3.75%, the first time since August last year. As yields rise, bond prices fall, and a US Treasury bond return index shows that the gains in the bond market so far this year have been completely wiped out. The decline in prices of bonds issued at lower yields has caused the gains in the bond market since the end of last year to basically disappear.