U.S. Treasury yields fell Monday on a report that Iran has been urgently signaling it wants an end to hostilities and resumption of talks over its nuclear programs, easing concerns that a prolonged conflict will further boost oil prices and add to inflation.

Iranian missiles struck Tel Aviv and the port city of Haifa before dawn on Monday, killing at least eight people and destroying homes, prompting Israel's defense minister to warn that Tehran residents would "pay the price and soon."

Yields rose earlier on concerns about higher inflation from the conflict. There was "a spike in oil prices, which could potentially contribute to inflation data," said Dan Mulholland, head of rates — sales and trading, at Crews & Associates in New York. The dispute so far, however, has been relatively contained and has not increased safe-haven demand for U.S. Treasuries.

"It's an isolated thing between Iran and Israel. Obviously, if it escalated beyond that, then it would be a bigger issue," Mulholland said. "Them going to war isn't solving our country's debt and deficit issue either."

A $13 billion 20-year bond sale on Monday will be the next test of demand for longer-dated Treasuries, following strong auctions for 10-year notes and 30-year bonds last week.

Longer-dated debt has become less attractive to some investors due to concerns about the longer-term U.S. fiscal outlook, which has pushed their yields higher relative to shorter-dated notes over the past few months. But the higher yields were also seen as a factor boosting demand for last week's sales of $39 billion in 10-year notes and $22 billion of 30-year bonds.

TREASURY AUCTION

The Treasury saw soft demand for a $16 billion 20-year bond sale in May, which led to a broader Treasury market selloff that day. The issue has at times struggled to find strong buying interest since its reintroduction in 2020. The 20-year bond yield was last down around 2 basis points on the day at 4.917%. The yield on benchmark U.S. 10-year notes fell 1.9 basis points to 4.405% and the 30-year bond yield fell 1.7 basis points to 4.898%. The yield on the interest rate-sensitive 2-year note fell 1.3 basis points to 3.945%.

The U.S. government will also sell $23 billion in five-year Treasury Inflation-Protected Securities on Tuesday. Corporate supply may also weigh on the market this week.

Traders are also focused on a two-day Federal Reserve policy meeting that concludes on Wednesday, when central bank policymakers are expected to keep interest rates on hold and update their economic and interest rate forecasts.

Fed officials have expressed concerns that the Trump administration's tariffs will lead to an uptick in inflation and weigh on economic growth, though so far this worry has not been clearly reflected in the hard economic data. Investors will be closely watching how many rate cuts Fed officials signal for this year, with many analysts expecting 25 basis points or 50 basis points of reductions by the end of 2025.

Fed funds futures traders are pricing in a 65.5% probability of 50 basis points or more in rate cuts by December, a 27.9% likelihood of one 25-basis-point cut and a 6.6% chance the Fed will leave rates unchanged, according to the CME Group's FedWatch Tool. The bond market will be closed on Thursday for the federal Juneteenth holiday.