TREASURIES-US bonds moderately higher on safe-haven buying fueled by Iran fears
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 26 (Reuters) - U.S. Treasury prices edged higher on Thursday on the back of some safe-haven bids as investors grew nervous about tensions involving Iran, also pricing in expectations that the Federal Reserve will hold interest rates steady at least for the first half of the year.
Iran and the United States are holding indirect talks in Geneva over their long-running nuclear dispute to avert a conflict after U.S. President Donald Trump ordered a huge military build-up in the region.
Iran, which says its nuclear program is peaceful, has agreed in principle to accept curbs to its nuclear activities in return for the lifting of sanctions but rejects tying the talks to other issues.
"There's some fear here of what's going on with Iran," said Stan Shipley, fixed income strategist, at Evercore ISI in New York. "The question is: are we going to war with Iran? So there's some flight to safety here."
At the same time, bond investors continued to factor in a more gradual pace of easing from the Federal Reserve in 2026 given the recent batch of data showing a steadier economy that will likely avoid recession this year and next.
Thursday's economic data supported that view. Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 212,000 for the week ended February 21, data showed. Economists polled by Reuters had forecast 215,000 claims.
U.S. fed funds futures on Thursday priced in about 55 bps on easing this year, equivalent to about two rate cuts of 25 bps each, a scenario that has been in place since the start of the year. The first rate cut is not expected until July or September.
In late morning trading, the benchmark 10-year yield fell 3.2 basis points to 4.016% US10YT=RR, while 30-year yields slid 2.2 bps to 4.672% US30YT=RR.
FLATTENING CURVE
On the front end of the curve, the two-year yield, which reflects rate expectations, was down 2.5 bps at 3.446% US2YT=RR.
The yield curve was slightly flatter on the day, with the gap between two-year and 10-year yields slipping to 56 bps US2US10=TWEB from 57.9 bps late on Wednesday. It was last at 57.2 bps.
The curve has been flattening, a move in which short-term yields rise relative to longer-dated Treasuries, in 11 of the last 12 sessions. At one point, the 2/10 curve had been narrowing its gap for 10 consecutive sessions, the longest such stretch since November 2015.
Analysts attributed the flattening to expectations of fewer rate cuts and a January nonfarm payrolls report that showed an unexpected increase in new jobs.
Also on Thursday, the U.S. Treasury will auction $44 billion in seven-year notes and J.P. Morgan said the note could be difficult to absorb given the low level yields, suggesting this debt has become a little more expensive. Since the last auction, seven-year yields have declined by roughly more than 20 bps and now trading near their six-month lows.
