TREASURIES-US bonds steady as investors weigh ceasefire bid, Trump warning on Hormuz

By Gertrude Chavez-Dreyfuss

NEW YORK, April 6 (Reuters) - U.S. Treasuries were little changed on Monday, with investors caught between optimism over a reports of a ceasefire plan for the Middle East and unease over President Donald Trump's threat to escalate strikes on Iran if it does not reopen the vital Strait of Hormuz.

Volume was generally thin, with European and some Asian markets closed for the Easter holiday.

In midmorning trading, the benchmark 10-year yield, which falls when Treasury prices rise, was down slightly at 4.341% US10YT=RR. Last week, the yield posted its largest weekly drop since February 23.

On the shorter end of the curve, the two-year yield, which reflects interest-rate expectations, was flat at 3.852% US2YT=RR. It had its biggest weekly fall last week since late February.

A Pakistani-brokered plan emerged from intense overnight contacts and proposes an immediate ceasefire, followed by negotiations on a broader peace settlement to be concluded within 15 to 20 days, a source aware of the proposals said on Monday.

The plan follows a daring weekend rescue of a crew member of a U.S. fighter jet who had been stranded in Iran since Thursday after his aircraft was shot down; the pilot had been rescued in a separate operation carried out on Thursday.

"Markets are starting to digest that they can't take any single headline at face value. And part of that is that President Trump and Iran have been shifting their sentiment about how likely ceasefire negotiations are going to be," said Will Compernolle, macro strategist, at FHN Financial in Chicago.

"I think the market being rangebound, that kind of relative steadiness, is all about settling into this idea that first of all, the war is not going to end anytime soon, and second, the market also needs to get more evidence that things are escalating, or things are winding down" before making any bets, he added.

U.S. crude futures were modestly higher on the day, up 0.5% at $112.12 per barrel CLc1, while stocks were mixed, with the Nasdaq Composite .IXIC up the most.

In other Treasury maturities, U.S. 30-year yields were last flat at 4.90% US30YT=RR. The long bond yield had its biggest weekly slide since late February.

Treasuries showed little reaction to a report that U.S. services sector growth slowed in March, while businesses' input costs hit a near 3-1/2-year high, likely an indication that the prolonged war with Iran was boosting inflation pressures.

A stronger-than-expected U.S. payrolls report for March last Friday triggered a selloff in Treasuries, lifting their yields higher. The data cemented expectations that the Federal Reserve will hold interest rates steady for longer even in the midst of an easing cycle.

On Monday, U.S. rate futures priced out rate cuts this year, compared with about 55 basis points of easing before the Iran war began around five weeks ago.