The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, fell 3.51 basis points to 4.256%.
The yield on benchmark U.S. 10-year notes US10YT=RR fell 6.13 basis points to 4.684%. It reached 4.747% on Friday, the highest since January 2025.
The 30-year bond US30YT=RR yield fell 4.76 basis points to 5.2274% after peaking at 5.2811% on Friday, the highest since 2007.
The yield curve between 2- and 10-year notes US2US10=TWEB flattened to 43 basis points.
Fed, borrowing plans and economic data
The recent spike in oil prices amid the escalating war had fueled expectations that the Fed might need to raise rates to contain inflation, which remains stubbornly above the Fed's 2% annual target.
Traders are still parsing comments from Fed Chairman Kevin Warsh, who said last week that elevated Treasury yields have already tightened financial conditions even as the central bank held rates steady.
While the Fed was widely expected to leave rates unchanged at its July meeting, markets were pricing in roughly a one-in-three chance of a hike, reflecting growing uncertainty as traders adjust to Warsh's preference for less explicit forward guidance.
For September, fed funds futures now imply a 68% probability of a rate increase.
Separately, the Treasury Department is set to unveil its borrowing plans for the coming quarters this week, with investors watching closely for any signs of increased issuance of longer-dated debt.
The U.S. government said on Monday that it expects to borrow $739 billion in the third quarter, $68 billion more than it had anticipated in May. It will provide auction-size details on Wednesday morning.
Data on Monday showed that U.S. manufacturing activity increased to the highest level in more than four years in July amid strong order growth, boosting factory employment.
This week's main U.S. economic focus will be Friday's jobs report for July, which is expected to show that employers added 80,000 jobs last month, according to the median estimate of economists polled by Reuters.
Yields slip as oil eases on de-escalation hopes
U.S. Treasury yields slipped Monday as oil prices eased on hopes for a de-escalation of the conflict with Iran, even as traders weighed the odds of a Federal Reserve rate hike should the war drag on.
Oil prices fell about 5% to a three-week low on Monday after U.S. President Donald Trump held off on a fresh attack on Iran in the hope of sealing a quick deal that could boost oil supplies from the Gulf.
Tehran, however, said no talks were underway and none were planned — directly contradicting Trump's account and stoking concerns that a durable resolution remains elusive.
"This could be just another head fake in an ongoing conflict," said Robert Tipp, chief investment strategist and head of global bonds at PGIM Fixed Income.
He warned that the conflict could reignite or settle into a prolonged standoff that imposes lasting restrictions on oil flows — keeping upward pressure on crude prices and weighing on broader markets.
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