* Trump's unclear stance on Middle East war fuels

inflation fears

* Iran, Oman drafting protocol on Strait of Hormuz

traffic

* Fed rate-cut expectations fade after worrisome

inflation data

* Focus shifts to US payrolls report for March

(Adds comment, US data; updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 2 (Reuters) - U.S. Treasuries recouped

early losses to trade modestly higher on Thursday, as investors

weighed comments by President Donald Trump that dampened hopes

for a quick end to war in the Middle East against news that Iran

could be moving to reopen the Strait of Hormuz.

Trump's much-anticipated address to the nation late on

Wednesday offered little clarity on when the U.S. conflict with

Iran might wind down and, crucially, waved off any

responsibility for reopening the strait. Roughly 20% of global

oil supplies - about 20 million barrels per day - passes through

the waterway.

The speech drove oil prices sharply higher and heightened

fears that inflation would rule out easier monetary policy.

"If the conflict turns into a prolonged one, the focus turns

to growth even if you do have these inflationary pressures. And

we have actually seen that, ... with a slight chance of rate

cuts priced back in," said Chip Hughey, managing director of

fixed income at Truist Wealth in Richmond, Virginia.

"The decline on the longer portion of the curve reflects the

idea that sustained inflationary pressures would ultimately slow

growth, not just in the U.S., but globally."

Treasury yields, which rise when prices fall, started to

drift lower in the New York session, as buyers stepped in upon

seeing better entry levels.

The slide in yields accelerated after Iran said it was

drafting a protocol with Oman to monitor traffic in the Strait

of Hormuz, a move that analysts said could pave the way for

reopening the waterway. Iranian Deputy Foreign Minister Kazem

Gharibabadi said the protocol would not mean restrictions, but

rather would be a way to facilitate and ensure safe passage for

ships that pass through.

In afternoon trading, benchmark 10-year yields

were down 1.6 bps at 4.305%, after an earlier rise

triggered by Trump's speech. For the week, 10-year yields have

fallen about 13 bps, on pace for their largest weekly drop since

the week of February 9.

MORE AGGRESSIVE ACTION

Trump on Wednesday vowed more aggressive strikes on Iran and

suggested the war could escalate if leaders in Tehran did not

give in to U.S. terms during negotiations, with strikes on

Iranian energy and oil infrastructure possible.

That threat sparked a jump in Brent and U.S. crude

futures, which were last up 7.3% at $108.57 per barrel

and 11.3% higher at $111.45, respectively. The surge in oil

prices also led the market to drastically reduce its outlook for

Federal Reserve rate cuts this year to 7 basis points,

compared with 50 basis points of easing expected before the war

began on February 28.

On the shorter end of the curve, the two-year yield

, which reflects rate expectations, was down slightly

at 3.796%. So far this week, U.S. two-year yields have declined

by 12.2 bps, on track for their biggest weekly fall since late

July 2025.

The near closure of the Strait of Hormuz has snarled global

supply chains for products ranging from gasoline and natural gas

to jet fuel, fertilizer, chemicals, aluminum, pharmaceuticals

and cement.

The inflationary wave is already being felt, with the

average cost of gasoline topping $4 a gallon in some U.S. states

and the wider effect still to be felt.

The jump in inflation will make it harder for the Fed to

countenance a rate cut even as rising energy costs act as a tax

on consumers and a drag on domestic demand.

Much now depends on Friday's release of the U.S. nonfarm

payrolls report for March. The consensus forecast of economists

polled by Reuters is for a gain of 60,000 jobs last month. The

country shed 92,000 jobs in February.

Ahead of the payrolls number, jobless claims data on

Thursday indicated stable labor market conditions, with new

applications for U.S. unemployment benefits unexpectedly falling

in the latest week to 202,000.

In other pockets of the bond market, the yield curve was

little changed on Thursday, with the gap between two-year and

10-year yields at 51.3 bps.

The curve earlier showed a bull-flattening scenario as a

result of long-term yields falling faster than those on the

short end, but that reverted towards unchanged after news about

a potential reopening of the Strait of Hormuz.