TREASURIES-Yields down as Iran weighs US proposal to end war in the Gulf
By Matt Tracy
WASHINGTON, March 25 (Reuters) - U.S. Treasury yields were down in Wednesday trading as Iran reviewed a U.S. proposal to end the war in the Middle East.
The benchmark 10-year Treasury yield US10YT=RR was last down 7.2 basis points at 4.32%, while the yield on two-year notes US2YT=RR was last down 6.6 bps at 3.875%.
U.S. Treasury yields had climbed on Tuesday after an auction of $69 billion in two-year notes met underwhelming demand, as market uncertainty persisted around the Iran war and elevated oil prices.
The conflict in the Gulf and resulting spike in oil prices are stoking concerns of persistent inflation and a potential economic downturn.
"So I think that the auction results in general just show that investors are still hesitant to bid aggressively for the front end of the curve, despite the seemingly attractive valuations," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.
"The auction was just a compounding factor for the selloff associated with geopolitics," Hartman added.
The Treasury Department auctioned $70 billion in five-year notes on Wednesday. The sale's 2.29x bid-to-cover ratio, a key indicator of demand, was below the average 2.36x and the previous auction's 2.32x.
Five-year yields US5YT=RR spiked on the sale, but later dropped back down. They last stood at 3.96%.
Yields declined early on Wednesday after reports that the U.S. had sent Iran a peace plan, as well as that Iran would allow certain ships through the Strait of Hormuz, a vital pathway for oil shipments.
Iran is still reviewing the U.S. proposal despite an initial response that was negative, a senior Iranian official told Reuters later on Wednesday, indicating that Tehran had so far stopped short of rejecting it outright.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, viewed in the market as an indicator of economic expectations, was last at 44.33 basis points.
U.S. rate futures on Friday began to price in the possibility of an interest-rate hike later this year after the Fed and other central banks last week kept rates on hold. Markets last priced in a 95.9% chance of no hike for the Fed's April meeting, slightly lower than on Wednesday morning.
"Yields could remain elevated in the near-term as the Fed remains in 'wait-and-see' mode, but worries about slowing growth could limit the move higher," Oscar Munoz, chief U.S. macro strategist at TD Securities, wrote in a note.
