The yield on the benchmark U.S. 10-year Treasury note fell 3.2 basis points to 4.647% after falling as low as 4.626%.
U.S. crude dropped 7.71% to $82.42 a barrel and Brent tumbled to $88.17 per barrel, down 8.9% on the day to hold near one-week lows. Brent had touched a two-month high of $102 last week.
"You have a lot of cross-currents, and so what markets are struggling to digest is we're in the consistent kind of back and forth where it seems like, again, Donald Trump is showing his ability to control sentiment despite investors really not having a viable off-ramp or an end to the war and durably lower oil prices," said Jeff Klingelhofer, managing director at Aristotle Pacific Capital in Newport Beach, California.
"And in front of Wednesday's meeting, we're continuing to realize that we don't know what (Fed Chairman) Warsh believes, we don't know whether he truly believes that rates should be on pause or lower."
Yields have been rising in recent days as renewed strikes in the Iran war have caused a reversal in oil prices and again fanned inflation fears, in turn buoying expectations the U.S. Federal Reserve may hike interest rates. The 10-year yield is up about 23 basis points for the month, on track for its largest monthly increase since March, when the Iran war began.
The yield on the 30-year bond fell 3.3 basis points to 5.129% and was on pace for its biggest decline since July 17.
Expectations for a rate hike of at least 25 basis points from the Fed at its policy announcement on Wednesday are 37.9%, according to CME FedWatch, up from 16% a week ago. Markets are pricing in an 80.8% chance for a hike at the central bank's September meeting.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 32.5 basis points.
A growing number of major brokerages believe there is a real risk of the Fed delivering a rate hike at its meeting this week, given this month's surge in oil prices and the escalation in tensions in the Middle East.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, slipped 1.1 basis points to 4.32%.
A $69 billion auction of two-year notes was seen as solid by analysts, with demand of 2.66 times the notes on sale a touch above the 2.63 average. A $70 billion five-year auction was seen as soft, and the demand of 2.28 times was slightly below the 2.33 average.
More supply will come to the market on Tuesday when the Treasury auctions $44 billion in seven-year notes.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.202% after closing at 2.251% on July 24.
The 10-year TIPS breakeven rate was last at 2.212%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
Treasury yields fall as oil prices plunge
U.S. Treasury yields fell on Monday as oil prices plummeted after a suspension of U.S. air strikes against Iran and comments from President Donald Trump raised hopes of peace talks, with a rate decision from the Federal Reserve scheduled for later this week.
After Washington abruptly suspended a two-week campaign of air strikes against Iran on Saturday, Trump said on Monday that the U.S. was having "good talks" with Iran and there was a chance of a deal over their conflict, but warned U.S. strikes would resume if the negotiations failed to deliver.
However, Saudi Arabia, Jordan and Iraq reported drone attacks on Monday, as Tehran appeared to put Trump's latest turn to the test.
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