TREASURIES-US bonds inch higher with Iran still the main focus

By Gertrude Chavez-Dreyfuss

NEW YORK, April 22 (Reuters) - U.S. Treasuries edged higher on Wednesday, trading within narrow ranges, as investors remained cautious with an extended ceasefire between the United States and Iran already under strain after Iran seized two vessels in the strategically vital Strait of Hormuz over alleged maritime violations.

Iran's semi-official Tasnim news agency said the Revolutionary Guards escorted the two ships to Iranian shores. It was the first time that Iran seized ships since the war began at the end of February.

U.S. crude futures rose 2.4% to $91.84 per barrel CLc1, but Treasury yields, which move inversely to prices, slipped in a sign that investors are looking past the seizure of the ships.

In late morning trading, the benchmark 10-year yield was marginally down at 4.286% US10YT=RR. U.S. 30-year yields drifted lower as well, down less than 1 bp to 4.892% US30YT=RR.

At the shorter end of the curve, U.S. two-year yields, which reflect interest rate expectations, rose 1.3 bps to 3.792% US2YT=RR.

"The market seems to be taking any sign of a pause in the conflict as a set-up for a longer-term settlement," said Vinny Bleau, director, fixed income research, at Raymond James in Memphis. "(The 10-year yield) not being able to hold above 4.30% is a good sign as well in my view."

The U.S. yield curve flattened for a third straight session, with the gap between 2- and 10-year yields falling to 49.1 bps US2US10=TWEB, compared with 50.9 bps late on Tuesday.

The curve showed a bull flattening pattern where long-dated yields are falling faster than those of short maturities, reflecting expectations that the Federal Reserve will not reduce interest rates anytime soon.

A Reuters poll showed that most economists think the Fed will wait at least six months before cutting interest rates this year. There was no clear consensus where rates would end the year, but 71 economists still expected at least one cut. The median forecast expects a single reduction, matching the dot‑plot projections released by the central bank last month.

WARSH TAKEAWAY

Investors also weighed Fed Chair nominee Kevin Warsh's confirmation hearing on Tuesday before the Senate Banking Committee.

During what was viewed as a contentious hearing, Warsh sought to reassure lawmakers that monetary policy would remain free of political influence, even as an unresolved Justice Department investigation into current Chair Jerome Powell threatens to delay his confirmation.

"The hearing strengthens the view that Warsh may tighten conditions via balance sheet normalization while simultaneously loosening conditions by lowering interest rates," wrote Jeffrey Roach, chief economist for LPL Financial, in emailed comments.

"These actions may not occur until much later this year as conditions warrant."

The U.S. Treasury will auction $13 billion in reopened 20-year bonds on Wednesday. JPMorgan, in a research note, pointed out the auction could be well-received given that "yields (are) somewhat higher and risk appetite returning".

Since last month's auction, U.S. 20‑year yields have risen by just 6 bps, hovering near the midpoint of their post‑conflict range. JPMorgan noted that beneath that stability, the sector has seen significant volatility. The bond initially cheapened sharply on a relative‑value basis, before retracing in recent weeks and realigning with fundamentals.