TREASURIES-US bonds rise on growth fears as war rages into fifth week

By Gertrude Chavez-Dreyfuss

NEW YORK, March 30 (Reuters) - U.S. Treasuries rallied across the curve on Monday as mounting global growth concerns eclipsed inflation worries, with investors increasingly uneasy about a war entering its fifth week with no clear path to resolution.

The benchmark U.S. 10-year yield, which falls when prices rise, dropped for the first time in three days, down 9.6 basis points at 4.344% US10YT=RR, on track for its largest daily fall since early August. For the month, however, 10-year yields have advanced 38 bps, their largest monthly rise since December 2024.

On the shorter end of the curve, U.S. two-year yields, which reflect interest rate expectations, were down 8.8 bps at 3.828% US2YT=RR. It was the largest one-day decline since late August. For March, though, two-year yields have climbed 45 bps, the biggest monthly increase since October 2024.

The rise in Treasuries extended after Federal Reserve Chair Jerome Powell said on Monday longer-run inflation expectations appear to be "well-anchored" despite soaring oil prices. He added that the central bank also tends to look through supply shocks.

That suggests the Fed is likely in no rush to cut or hike interest rates. In the last few weeks the rate futures market has started to price in a rate increase by the Fed as oil prices surged.

Powell said, however, the Fed would "certainly be mindful" of how sharply higher oil prices affect inflation, after inflation having been above the 2% target for so long.

"The Treasury market had been myopically focused on inflation over the last two months, and is now wondering, well if oil prices go far enough, the economy is going to recession," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "And that's always good news for a rally in Treasuries."

A steep rally in oil prices - and the prospect of broader global inflation pressures - drove a broad surge in yields in the last few weeks. U.S. crude futures CLc1 have spiked more than 50% since the beginning of March, on pace for the biggest monthly gain since May 2020, which was the height of the COVID-19 pandemic.

FRUSTRATION BOILING OVER

Investors overall have become frustrated that the Middle East conflict is still raging and has seemingly broadened. War has been reignited between Israel and Hezbollah in Lebanon, where three U.N. peacekeepers from Indonesia were killed in two separate incidents.

At the same time, the Iran-aligned Yemeni Houthis became involved when they launched their first attacks on Israel.

U.S. President Donald Trump also warned Iran on Monday to open the Strait of Hormuz, a waterway used for shipping a fifth of global oil and liquefied natural gas, or risk U.S. attacks on its energy infrastructure.

But Iran remained defiant. "Our position is clear. We are under military aggression. Therefore, all our efforts and strength are focused on defending ourselves," Iranian Foreign Ministry spokesperson Esmaeil Baghaei told a press conference.

Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania, said there did not seem to have been that much improvement in the conflict.

"Investors would have thought that the war being this far along, we would have been closer to a conclusion and it doesn't feel that way. That is allowing investors to start thinking through or start incorporating a longer-term view given the current events and that's what's weighing on yields," he said.

U.S. 30-year yields dropped 8 bps to 4.902% US30YT=RR, on pace for the biggest daily pullback since February 12. But on a monthly basis, the long bond yield has risen 27 bps, the largest increase since December 2024.

The yield curve was largely unchanged from Friday, with the gap between two-year and 10-year yields at 51 bps US2US10=TWEB. Earlier in the global session, the curve steepened to 53.10 bps, the widest spread since March 17.

For now, long-term interest rates were modestly falling faster than short-term rates, as inflation expectations diminished slightly.

U.S. rate futures on Monday have priced out rate cuts for 2026 and reduced rate hike expectations this year as well. For 2026, rate futures are pricing in just 10 bps in hikes, down from 15 bps late last week.