TREASURIES-US government bonds advance as Middle East de‑escalation talk lifts demand

By Gertrude Chavez-Dreyfuss

NEW YORK, March 31 (Reuters) - U.S. Treasuries ended the first quarter higher on Tuesday, rebounding after a month of heavy selling, as a report suggesting possible de-escalation in the Middle East boosted demand for government debt.

In late morning trading, the benchmark 10-year yield slipped 2.2 basis points to 4.321% US10YT=RR, falling for a second straight session. For the month of March, however, 10-year yields surged 35 bps, putting them on track for their largest monthly rise since December.

On the front end of the curve, U.S. two-year yields, which reflect interest rate expectations, were down 3.9 bps at 3.789% US2YT=RR. But for the month, two-year yields have climbed 41 bps, their biggest monthly increase since October 2024.

The Wall Street Journal reported on Tuesday that President Donald Trump was willing to halt the military campaign against Iran despite a largely closed Strait of Hormuz. Citing administration officials, the report said Trump was willing to move away from a complex operation and reopen the vital strait - a flashpoint for oil prices and global trade - at a later date.

Trump threatened on Monday to obliterate Iran's energy plants if it does not agree to a peace deal and open the strait, which has effectively been blocked by Tehran.

"There's a growing feeling that the U.S. is backing off on taking over the Strait of Hormuz and that the Trump administration is trying to tone down the rhetoric on Iran," said Tom di Galoma, managing director for global rates trading at Mischler Financial.

"The markets like that and that's why we are rallying."

In other maturities, U.S. 30-year yields were little changed at 4.912% US30YT=RR. But on a monthly basis, the long bond yield has risen 28 bps, its largest increase since December 2024.

The yield curve was steepened on Tuesday, with the gap between two-year and 10-year yields at 52.70 bps US2US10=TWEB, compared with 51.80 bps late on Monday. Earlier in the global session, the curve steepened to 53.60 bps, the widest spread since March 17.

The curve showed a bull steepening pattern, in which yields on short-dated notes are falling faster than those on longer-term maturities, which is an indication that markets are again entertaining interest rate cuts for 2026.

U.S. rate futures on Tuesday priced in about 6.5 bps of easing, compared with 10 bps of hikes reflected on Monday, according to LSEG estimates.

SIGNS OF SLOWDOWN

U.S. data on Tuesday began to show signs of a slowdown, though it had little impact on Treasuries overall, given that investors remained focused on the war and its implications for oil prices and the global economy.

Data showed that U.S. job openings fell more than expected in February and hiring dropped to the lowest level in nearly six years, government data showed on Tuesday.

Job openings, a measure of labor demand, were down 358,000 to 6.882 million by the last day of February, the Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey, or JOLTS report.

Economists polled by Reuters had forecast 6.918 million unfilled jobs. The job openings rate dropped to 4.2% from 4.4% in January.