A sharp fall in oil prices has taken some of the heat out of the bond market. Treasury yields slipped, the dollar softened and gold recovered ground on Monday, as traders trimmed their bets on a Federal Reserve rate hike in December and braced for Tuesday’s US midterm elections.
Oil does the heavy lifting
Energy was the driver. Both benchmark oil prices fell more than 7% on Monday as talks between Iranian and Qatari officials lifted hopes for an end to the war with Iran. Prices ticked back up early on Tuesday. Brent crude was around $104.80 a barrel and US crude near $96.66, after a report that the United States had struck Iran’s Qeshm Island.
For bond investors, oil matters because it feeds inflation. Cheaper crude eases fears that price pressures will stay high, which in turn reduces the case for more aggressive action by the Fed.
Yields retreat
The US 10-year Treasury yield dropped nearly six basis points to 4.871%. That is a notable move from last week. The 10-year closed at about 5.05% on October 28, its highest level in years. Another factor was the technology selloff. Yields have retreated from multi-year highs as the AI-led sell-off in tech stocks increased demand for government bonds.
Fed expectations cool, but only slightly
Traders still expect the central bank to tighten. Money markets see a 75% chance of a rate hike in December, down from 80% a week ago, according to the CME FedWatch Tool. Other readings were slightly lower, with one placing the odds at 74%.
The backdrop is a central bank that has already moved once this year. The Fed raised rates by 25 basis points on September 16, its first increase since July 2023, and held steady on October 28 in a 10-2 vote, with Lisa Cook and Beth Hammack voting for a hike.
The tone from Fed leadership has been measured. Strategists at Brown Brothers Harriman noted that Fed Chair Kevin Warsh struck a patient tone despite stalled progress on inflation, and that worries about an AI investment slowdown cast doubt on the growth outlook and dampened hike expectations.
Dollar and gold respond
The dollar lost some ground. The US Dollar Index traded around 101.68, down 0.28% on the day. A softer dollar and lower yields are friendly conditions for gold. Gold rallied more than 2% to $3,954 an ounce. The rebound follows a rough week, in which rising rate expectations had pushed bullion toward yearly lows.
A fixed-income outlook
Not everyone sees the recent rally in bonds as the start of a durable move. One fixed-income manager expects the Fed to deliver one more hike in December and then hold through 2027, a path it describes as less hawkish than current market pricing and dependent on how the energy shock passes into core inflation. The same manager forecasts the 10-year yield at 4.95% for the end of 2026 and 4.75% for the end of 2027.
What comes next
The week offers several catalysts. Traders are watching the midterm elections, factory orders, the JOLTS job openings survey and speeches by Fed officials. Friday’s October jobs report and the November 10 inflation reading could firm up or weaken December hike bets.
The election itself adds uncertainty. Analysts say a shift in control of Congress could alter expectations for fiscal policy, tariffs and government borrowing, all of which influence long-term yields. Prediction markets have leaned toward Democratic gains, according to commentary on the dollar, though polling and betting odds can move quickly.
The bottom line
Monday’s move was less a change of view than a pause. Inflation remains above the Fed’s target, oil is still near $100 and policymakers have shown they are prepared to act. But with growth worries mounting and tech stocks under pressure, bond investors have found a reason to buy. For the Fed, the coming data will decide whether December’s decision is a close call or a formality.
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