TREASURIES-US bonds recover some losses, as markets shrug off Iran war escalation

* Treasuries volumes have been subdued, investors eschew large bets

* US rate futures price in 14 bps of cuts this year

* Prices rebound from earlier losses

By Gertrude Chavez-Dreyfuss

NEW YORK, April 20 (Reuters) - U.S. Treasuries came off their lowest levels on Monday, as bond investors largely looked past the weekend's turbulence in the Middle East that raised concerns about the state of the fragile ceasefire between the United States and Iran, instead focusing on planned negotiations between the parties.

Movements in Treasuries were modest on subdued trading volumes, as investors appear reluctant to make large directional bets due to the uncertainty surrounding the outlook for the Gulf war that has caused energy prices to surge. Market participants said the muted price action reflected confidence that any escalation in the region will be contained.

In midday trading, the benchmark 10-year yield, which moves inversely to the price, was up 2 basis points at 4.264% , while U.S. 30-year yields rose 1.3 bps to 4.898% . Investors are looking ahead to peace negotiations between the United States and Iran, as Pakistan attempts to resolve differences ahead of the potential discussions. Iran is considering attending the peace talks, a senior Iranian official told Reuters on Monday, a softening of its earlier position, but no decision had been made.

"The Iranians shifted gears a little bit over the weekend...but they don't have a lot of leverage here. We're in a holding pattern for the most part and everyone is waiting to see how things shake out ultimately," said Gregory Faranello, head of U.S. rates strategy at AmeriVet Securities in New York. "I think we clear this period of time, but it could be a little bumpy."

Vice President JD Vance and the U.S. delegation are expected to lead a second round of negotiations in Pakistan. President Donald Trump has said he would send a U.S. delegation to Pakistan for additional talks before a ceasefire is set to expire in the coming days.

On the shorter end of the curve, the two-year yield, which reflects interest-rate expectations, climbed 2.7 bps to 3.727% .

U.S. crude futures were up nearly 6% on the day at $89.01 , still far below the highs hit at the peak of the conflict. Higher oil prices also helped lift Treasury yields with inflation fears ramping up.

The Trump administration earlier said it seized an Iranian cargo ship that tried to breach a U.S. blockade, angering Tehran, which vowed to retaliate, roiling markets earlier in the session.

YIELD CURVE FLATTENS MODESTLY

Last Friday, Iranian Foreign Minister Abbas Araqchi said the Strait of Hormuz was open to all commercial vessels for the remainder of a U.S.-brokered 10-day truce agreed between Israel and Lebanon to halt fighting between Israel and Iran-backed Hezbollah. Following the announcement, oil prices plunged, stocks rallied and U.S. Treasuries surged, pushing yields lower.

But that Hormuz opening was brief as Iran reimposed its own restrictions on the strait, the transit artery for one-fifth of the world's oil and liquefied natural gas supply, after the United States refused to lift its blockade of the waterway.

The U.S. yield curve slightly flattened on Monday, with the gap between two-year and 10-year yields at 53.3 bps , compared with 53.8 bps late on Friday.

The curve exhibited a bear flattening move, with short-term yields modestly rising faster than those on the long end of the curve, which reflects expectations that the Federal Reserve will be on hold for some time as it grapples with still-high inflation.

In the U.S. rate futures market, traders were pricing in about 14 bps of easing this year, inching higher from about 9 bps a few days ago. Prior to the Iran war, futures markets were pricing in a 55-bps drop in rates, according to LSEG estimates. (Reporting by Gertrude Chavez-Dreyfuss; editing by David Gaffen)