TREASURIES-Yields rise as end to Middle East conflict uncertain

By Matt Tracy

WASHINGTON, March 26 - U.S. Treasury yields rose early on Thursday as ongoing Middle East tensions drove investor concerns about higher oil prices and persistent inflation.

The benchmark U.S. 10-year Treasury yield US10YT=RR on Thursday was last up 4.2 basis points at 4.37%. The two-year note's yield US2YT=RR was last up 5.4 bps at 3.934%.

Investors have weighed the impact of a continued back-and-forth between the U.S. and Iran this week. It has sent mixed signals about the possibility of a conclusion to war in Iran that began at the end of last month with coordinated attacks by the U.S. and Israel.

U.S. President Donald Trump on social media has this week repeatedly claimed progress in peace talks with Tehran. But Iran's foreign minister told Reuters that messages exchanged between the two countries "does not mean negotiations with the U.S.".

AIRSTRIKES ARE EXPECTED OVER THE COMING DAYS

Continued airstrikes and the landing of U.S. ground troops are reportedly expected in the region in the coming days as Iran has refused to re-open the Strait of Hormuz, which is the route for much of the world's oil supply.

"Mideast tensions have bond yields rising due to higher oil prices where Brent crude is at $106, up $4 overnight," wrote Tom di Galoma, managing director of global rates trading at broker-dealer Mischler Financial Group, in a note on Thursday.

"Yields rose during the APAC and EMEA sessions as banks and money managers liquidate bond holdings ahead of this weekend's airstrikes."

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 markets as an indicator of economic expectations, was last at 43.59 basis points.

Elevated oil prices have raised concerns of persistent inflation, with U.S. rate futures beginning last week to price in the possibility of an interest-rate hike later this year. Markets last priced in a 95.9% chance of no hike for the Fed's April meeting and a 28.1% chance of a hike by the end of the year.

Data on Thursday showed new U.S. jobless claims rose slightly last week to a seasonally adjusted 210,000, which was in line with economists' forecasts.

Treasury auctions this week for two- and five-year notes US5YT=RR met with tepid demand. The Treasury Department is scheduled to auction $44 billion in seven-year notes US7YT=RR later on Thursday.