The announcement of a peace agreement between the United States and Iran has triggered a wave of market optimism, leading to a sharp decline in international oil prices on Monday alongside a rally in risk assets and US Treasury prices.

The energy market exhibited the most pronounced reaction. The price for WTI crude oil futures for July delivery fell by 5.04% to $80.60 per barrel, while Brent crude for August delivery dropped 4.23% to $83.64 per barrel.

Asian stock markets recorded significant gains. South Korea's KOSPI index and Japan's Nikkei 225 index rose more than 5%, and Australia's S&P/ASX 200 index advanced 1.3%. Futures for major US and European indices also moved higher, with Dow Jones futures up 0.82%, S&P 500 futures gaining 1.07%, and Nasdaq futures climbing 1.80%. Euro Stoxx 50 futures increased by 1.6%.

Josh Gilbert, a chief analyst, noted, "Markets have been anticipating this news for months, and the relief effect is now materializing, with oil prices falling and risk assets strengthening... This follows confirmation from the former US administration that the Strait of Hormuz would reopen and the US naval blockade would be lifted."

The drop in oil prices and the prospect of peace also influenced other asset classes. The US Dollar Index declined 0.32% to 99.483, while the benchmark 10-year US Treasury yield fell 5 basis points to 4.42%, signaling that investors' inflation concerns are easing due to the retreat in energy costs.

An investment strategist commented, "The most immediate impact is that the inflation risk premium the market has been carrying since the Strait's closure will be repriced." He added, "Oil prices are showing the most volatility, but a more telling signal is actually coming from the bond market: bond yields are falling while stock prices rise, indicating the market is viewing the energy shock as transitory rather than structural."

Cooling Rate Expectations Fuel Treasury Rally

Following news of the US-Iran agreement, investors scaled back their expectations for Federal Reserve interest rate hikes, leading to a broad-based rally in US Treasuries. Yields fell across the curve, with the steepest declines in short-dated bonds, which are most sensitive to monetary policy shifts.

Swap traders now price in roughly a 60% chance of a 25-basis-point Fed rate hike by year-end, down from approximately 80% on Friday. The rise in Treasury prices reflects market optimism that resolving the Iran conflict will aid in reopening the Strait of Hormuz and lowering oil prices.

Given that US Treasuries serve as a global benchmark for borrowing costs, the implications extend far beyond the $31 trillion US Treasury market, affecting everything from corporate debt to emerging market assets.

A hedge fund manager stated, "With oil price pressures easing, central banks can now adopt a more dovish stance, as they have the capacity to wait and observe short-term inflation dynamics."

Treasury Yields Decline Post-Agreement News

The yield on the US two-year Treasury note fell 5 basis points to 4.03%, while the benchmark 10-year yield also dropped 5 basis points to 4.42%. The 30-year yield declined 5 basis points to 4.92%, marking its lowest level since May 7th.

The United States and Iran announced they had reached a deal to reopen the Strait of Hormuz, a transit route for about one-fifth of the world's oil supply. This is welcome news for the US, where inflation has been surging at its fastest pace in three years, refocusing market attention on the new Fed Chair and the central bank's subsequent policy path.

The Federal Reserve is scheduled to announce its latest interest rate decision on Wednesday. Economists widely anticipate the Fed will hold the benchmark rate steady in the 3.5%–3.75% range while assessing how the energy price shock from the conflict impacts the economy.

However, Treasury investors cannot afford to be entirely complacent. Within minutes of the agreement's announcement, the US and Iran offered differing interpretations of its terms, hinting at the challenges in reaching consensus on lingering issues such as Iran's nuclear program.

A strategist in Sydney remarked, "The Strait of Hormuz is expected to formally reopen on Friday, so there could be an anxious waiting period from now until then. Israel's actions during this period will also be a significant uncertainty."

Safe-Haven Appeal Persists Amid Market Concerns

Beyond the safety of US Treasuries, gold prices also rose. An analyst observed, "Gold is an interesting exception here. In a pure risk-on trade, gold prices should fall as geopolitical premiums unwind, yet prices remain around $4,300 per ounce, suggesting the market does not yet fully trust this agreement."

Spot gold prices increased nearly 2% to $4,302.19 per ounce. Uncertainty persists around the US-Iran deal, as it remains unsigned and carries implementation risks.

An analyst cautioned, "This agreement isn't actually set to be signed until June 19th, details are still sparse, and this conflict has shown more than once that headlines can turn on a dime."

Analysts also emphasized that the oil outlook hinges on the speed of normalized shipping and production. Assuming the Strait remains open and exports recover, one analyst forecasts Brent crude could fall to around $80 per barrel by year-end.

He warned, however, that damage to refining infrastructure, the presence of sea mines, and uncertainty around tanker shipping could delay the return to normal operations. Nonetheless, he suggested markets might take comfort from the prospect that expectations of a global supply glut could re-emerge if oil supply recovers to 60-70% of pre-conflict levels.

For investors, the most significant impact may lie in how falling energy prices affect inflation and central bank policies. Lower oil prices can ease pressure on households and businesses while reducing the risk of a broad-based inflation resurgence.

An analyst concluded, "For global investors, the overall picture is positive. A sustained decline in oil prices would alleviate pressure on central banks."