WTI falls on Iran deal hopes as US Treasury yields decline

5.123%: US 10-year Treasury yield slips nearly two basis points.
$97.58: WTI retreats as reports on US-Iran negotiations diverge.
7.3% drop in Pending Home Sales as higher mortgage rates undermine demand.

Reports that Washington and Tehran may be close to an agreement helped push US Treasury yields slightly lower on Tuesday. A separate report, however, indicated that US-Iran negotiations were continuing and no deal had yet been finalised.

5.12% in focus: US 10-year yields slip on diplomatic hopes and weak housing data

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

5.123% is the latest US 10-year Treasury yield, down nearly 2 basis points. Geopolitical developments initially drove the benchmark yield lower as energy prices declined. A rebound in US equities also weighed on US bond yields. West Texas Intermediate (WTI), the US crude oil benchmark, trades at $97.58 per barrel, down 0.67%.

At 101.66, the US Dollar Index (DXY) has slipped 0.32%. The index tracks the US 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% forecast. Next on the US economic calendar are Initial Jobless Claims on October 22 and S&P Global Flash PMIs on October 23.

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

An unchanged interest rate decision at the Federal Reserve’s October meeting was priced into money markets. For December’s meeting, however, the probability remains at 89%, according to Prime Terminal.

10-year US Treasury note yield: Daily chart

Interest rates: Key questions

Interest rates explained

Borrowers pay interest on loans from financial institutions, while savers and depositors receive interest on their funds. These rates reflect base lending rates, which central banks adjust as economic conditions change. 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 undershoots the target, a central bank may lower base lending rates to encourage borrowing and support economic activity. Inflation substantially above 2%, by contrast, normally prompts an increase in base lending rates to bring price growth down.

Interest rates and currency strength

A country’s currency generally benefits from higher interest rates, as global investors find it more attractive to place their funds there.

Interest rates and Gold prices

Holding Gold becomes more costly in opportunity terms when interest rates rise, compared with owning interest-bearing assets or keeping cash in a bank. Higher rates therefore tend to put pressure on Gold prices. High interest rates also usually strengthen the US Dollar (USD). As Gold is priced in Dollars, a stronger Dollar tends to reduce its price.

The Fed funds rate explained

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 market coverage. The Fed specifies a range, such as 4.75%-5.00%, but the quoted figure is the upper bound, in this example 5.00%. The CME FedWatch tool tracks market expectations for the future Fed funds rate. Those expectations influence trading across many financial markets as participants anticipate the Federal Reserve’s next monetary policy decisions.