US quits Iran deal drives yields down

US government bond yields across maturities fell on Tuesday as demand for the safe-haven investment increased following President Donald Trump's announcement that the country would withdraw from its nuclear deal with Iran. But the moves were relatively muted, with the 10-year Treasury yield reaching a weekly high of 2.987 percent, before falling to 2.974 percent, just 2 basis points above Monday's close. That suggested markets had already priced in the possibility of US withdrawal.
"The market has been preparing, in a sense, for this announcement. The combination of the changeover in the president's team from Tillerson to Pompeo and the appointment of John Bolton was a signal to the market of the direction that the administration was going," said Brian Daingerfield, macro strategist at NatWest Markets in Stamford, Connecticut.
In a televised speech, Trump said the United States would pull out of a 2015 international agreement designed to deny Tehran the ability to build nuclear weapons, and also reinstate sanctions on Iran. The decision is likely to raise the risk of conflict in the Middle East, upset America's European allies and disrupt global oil supplies.
The response in currency markets was similarly muffled, with the dollar, which is also a safe-haven investment, up to 93.105 against a basket of six currencies, having hit a session high of 93.280 earlier in the day. The lassitude across asset classes may also suggest investors believe there is more to be revealed about the deal.
"I think right now there's still quite a bit of uncertainty about the future of the deal even now that the US has made its intentions clear," said Daingerfield.
The European Union has said it will continue to uphold the accord regardless of US participation. And Iran's response is also not yet clear.
What's more "you could argue that President Trump being open to the negotiation of a better deal while also hanging the risk of sanctions over Iran_ that if an agreement could still be reached, a risky scenario could be avoided," said Daingerfield.
The Treasury Department on Tuesday auctioned $31 billion in three-year notes to modestly improved participation, part of its auction of $73 billion in US debt this week. The issuance of three-year notes at auction increased by $1 billion from April, and by $7 billion from February. The two-year note's yield was last at 2.514 percent, up from 2.497 at the end of Monday's session.