TREASURIES-US yields tick lower amid shaky Mideast truce, rate cut expectations

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Investors focused on fragile Israel-Iran ceasefire

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Powell's comments seen as opening door to potential rate cuts

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German budget adds some selling pressure for long-dated debt

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Two-year auction later on Tuesday

(Writes through, updates market levels, adds context, analyst)

By Davide Barbuscia

NEW YORK, June 24 (Reuters) - U.S. Treasury yields ticked lower on Tuesday as oil prices fell amid fragile optimism over a ceasefire between Israel and Iran, while Federal Reserve Chair Jerome Powell's comments bolstered hopes for near-term rate cuts.

President Donald Trump on Monday announced a ceasefire between Israel and Iran that offered relief to rattled investors after a 12-day conflict that bruised global risk assets and stoked inflation fears. Markets welcomed the move and largely brushed off ceasefire violations by both sides. Oil prices fell about 5% to a two-week low on Tuesday on expectations the ceasefire will reduce the risk of oil supply disruptions in the Middle East. Treasury yields, which rise when prices drop, had climbed earlier in the day, mirroring a surge in Germany's long-term bond yields that was sparked by a draft budget that included record investment and higher borrowing. Shorter-dated Treasury yields were also higher in early trade, likely in anticipation of a two-year note auction later in the day.

However, the mild selling pressure reversed after U.S. Fed Chair Powell said on Tuesday he was open to the idea that the inflation he and other Fed officials worry will be kindled by Trump's tariffs may prove to be less severe than thought.

Those comments followed recent remarks from two Fed officials, both Trump appointees, who said rates could fall as soon as the July meeting given inflation has not yet risen in response to tariffs.

Adding downward pressure on yields, U.S. consumer confidence deteriorated in June, the Conference Board said on Tuesday.

"(Powell) is acknowledging that their forecasts could be wrong and if you look at the hard data itself you could probably argue that the Fed should be cutting right now," said Lawrence Gillum, chief fixed income strategist for LPL Financial. "He's open to being wrong, which is good," added Gillum.

Expectations for a 25 basis point interest rate cut in July were roughly unchanged at 20% on Tuesday, CME Group data showed, while bets on a first 25-bps cut in September stood at 69%, from 67% on Monday.

Trump, who tapped Powell as Fed chair during his first term but is widely expected to replace him when his tenure ends next spring, has repeatedly pushed for aggressive interest rate cuts.

Euro zone government bond yields surged on Tuesday after the German cabinet passed a draft budget for 2025 and framework for 2026 that include record investments in both years to stimulate growth in Europe's biggest economy.

That added a steepening impulse to the U.S. Treasury yield curve too earlier on Tuesday, meaning it contributed to some selling pressure for long-dated debt, as higher global government debt supply could erode demand for Treasuries.

"It is very difficult to say what is driving price action now because of geopolitics," said Slawomir Soroczynski, head of fixed income at Crown Agents Investment Management. "There's definitely some inspiration coming from (German) bunds and a decent steepening pressure there today," he added.

Benchmark 10-year Treasury yields were last at 4.304%, about two basis points lower than on Monday, while 30-year yields were a touch lower at 4.845%. Two-year yields were last at 3.827%, flat on the day. They hit an intra-day low of 3.808%, their lowest since May 8.

Later on Tuesday, the Treasury Department will sell $69 billion in two-year notes. That will be followed by sales of five-year and seven-year debt on Wednesday and Thursday.

(Reporting by Davide Barbuscia; Editing by Nick Zieminski)