TREASURIES-US government bonds climb on hopes for war de‑escalation
By Gertrude Chavez-Dreyfuss
NEW YORK, March 31 (Reuters) - U.S. Treasuries ended the first quarter higher on Tuesday, rebounding after a month of heavy selling and rallying in line with stocks, as a report suggesting possible de-escalation in the Middle East boosted demand for government debt.
Bond investors also shifted their focus to prospects for lower growth instead of inflation expectations if the conflict drags on, prompting investors to price in possible rate cuts this year.
In afternoon trading, the benchmark 10-year yield, which falls when Treasury prices rise, slipped 3.1 basis points to 4.321% US10YT=RR, falling for a second straight session. For the month of March, however, 10-year yields surged 35 bps, putting them on track for their largest monthly rise since December 2024.
On the front end of the curve, U.S. two-year yields, which reflect interest rate expectations, were down 3.3 bps at 3.795% US2YT=RR. But for the month, two-year yields have climbed 42 bps, their biggest monthly increase since October 2024.
"The market has repriced, moving away from fears of higher interest rates," said Joseph Abate, head of rates strategy at SMBC Nikko Securities in New York.
He noted that in the first few weeks of the war the rates market had priced in some tightening, but now has subsequently taken that out.
"Now, we're priced in for a little bit of easing. I think that's always been the more central case. The Fed tends to look through the inflation shock, and toward more demand destruction from higher oil and gasoline prices."
MARKET BOLSTERED BY SIGNALS ON POSSIBLE HALT TO CONFLICT
Treasuries were also bolstered in part by a Wall Street Journal report on Tuesday that U.S. President Donald Trump was willing to halt the military campaign against Iran despite a mostly closed Strait of Hormuz - a flashpoint for oil prices and global trade.
Trump had threatened on Monday to obliterate Iran's energy plants if it did not agree to a peace deal and open the strait.
U.S. Defense Secretary Pete Hegseth confirmed on Tuesday that talks to end the regional conflict are ongoing and gaining strength, but said the United States is prepared to continue the war if Iran does not comply.
Tom di Galoma, managing director for global rates trading at Mischler Financial, said Treasuries traded higher because "there's a growing feeling that the U.S. is backing off on taking over the Strait of Hormuz and that the Trump administration is trying to tone down the rhetoric on Iran."
In other maturities, U.S. 30-year yields dipped 1.7 bps to 4.889% US30YT=RR. But on a monthly basis, the long bond yield has risen 26 bps, its largest increase since December 2024.
The yield curve also steepened on Tuesday, with the gap between two-year and 10-year yields widening to 53.6 bps US2US10=TWEB, compared with 51.80 bps late on Monday. Tuesday's spread was the largest since March 17. It was last at 51 bps.
The curve showed a bull-steepening pattern, in which yields on short-dated notes are falling faster than those on longer-term maturities, which is an indication that markets are again entertaining the possibility of interest rate cuts in 2026.
U.S. rate futures on Tuesday priced in about 7 bps of easing, a turnaround from the 10 bps of hikes reflected on Monday, according to LSEG estimates.
SIGNS OF SLOWDOWN
U.S. data on Tuesday showed signs of slowing growth, although Treasuries were largely unmoved by the data release as attention stayed squarely on the war and its potential endgame.
U.S. job openings fell more than expected in February and hiring dropped to the lowest in nearly six years, data showed on Tuesday.
Job openings, a measure of labor demand, were down 358,000 at 6.882 million by the last day of February, the Bureau of Labor Statistics said in its Job Openings and Labor Turnover Survey, or JOLTS report.
Economists polled by Reuters had forecast 6.918 million unfilled jobs. The job openings rate dropped to 4.2% from January's 4.4%.
