* US-Iran talks in Islamabad may resume, calming oil

markets

* US PPI up less than expected; little impact on bond

market

* Fed rate cut expectations fade, yield curve flattens

(Adds new comments, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 14 (Reuters) - U.S. Treasuries firmed on

Tuesday, lifted by optimism that the Iran war could wind down

soon, though trading remained subdued as investors consolidated

holdings and awaited clearer developments on the conflict.

The United States and Iran could resume talks in Islamabad

this week to end the war, sources told Reuters on Tuesday, after

the collapse of weekend negotiations prompted U.S. President

Donald Trump to order a blockade on Iranian ports.

While the U.S. blockade drew an angry response from Iran,

signs that diplomatic engagement might continue helped calm oil

markets, pushing benchmark prices below $100 on Tuesday.

Brent crude futures settled at $94.74 per barrel,

down 4.6%. U.S. West Texas Intermediate crude also

settled lower on the day, down 7.87% at $91.28 a barrel.

"Everything is still in wait-and-see mode, but we do have a

little bit of optimism in the market right now. It's obvious

that both the U.S. and Iran want to have some conclusion to

this, and they're working towards that," said Jim Barnes,

director of fixed income at Bryn Mawr Trust in Berwyn,

Pennsylvania.

"Before, it seemed as if they were both trying to get the

upper hand to some extent, and that's where the uncertainty kept

increasing. Now, that uncertainty has somewhat dissipated and

the market is finding comfort that a deal is going to be reached

at some point," Barnes said.

In afternoon trading, the benchmark 10-year yield, which

moves inversely to the price, was down 4.3 basis points at

4.254%. U.S. 30-year yields fell 3.3 bps to 4.867%

.

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

reflects interest-rate expectations, also dipped, down 3.2 bps

at 3.747%.

David Rolley, co-head of the Global Fixed Income Team at

Loomis Sayles, said he was a little more pessimistic about the

end of the Iran conflict.

"There seems to be a disconnect, not so much about the

volumes that are impacted by the closure of the Strait of

Hormuz, but the market expectation for the duration of the

conflict," Rolley said.

"I was thinking about the Ukraine-Russia war. When it

launched in 2022, the baseline forecast was that we're not going

to be talking about in 2026, four years later. But here we are."

COOLER-THAN-EXPECTED PPI

Data showing a lower-than-expected increase in U.S. producer

prices for March had little impact on Treasuries, as investors

remained more attuned to geopolitical developments in the Middle

East.

The Producer Price Index (PPI) for final demand rose 0.5%

last month after a downwardly revised 0.5% gain in February,

data showed. Economists polled by Reuters had forecast the PPI

accelerating 1.1% after a previously reported 0.7% gain in

February.

In the 12 months through March, the PPI advanced 4.0% after

increasing 3.4% in February. A Reuters poll forecast showed a

year-on-year increase of 4.7%.

"This PPI report shows inflation isn't gaining momentum -

it's being influenced by external shocks," Gina Bolvin,

president of Bolvin Wealth Management Group in Boston, wrote in

emailed comments.

"Underneath that, core inflation is relatively steady, which

suggests the broader economy isn't overheating. That split is

what makes this moment tricky. It leaves the Fed in a holding

pattern-unable to ignore higher headline inflation, but also

hesitant to react to what looks like a temporary, supply-driven

move."

Following the PPI data, U.S. rate futures have priced out

expectations of an interest rate cut by the Federal Reserve this

year, factoring in just 7 bps of easing, compared with about 55

bps before the Iran war, according to LSEG estimates.

Another 13 bps of rate declines are implied next year, LSEG

data showed.

In other pockets of the bond market, the U.S. yield curve

flattened on Tuesday, with the gap between two-year and 10-year

yields at 50.3 bps, compared with 51.7 bps late

on Monday.

The curve exhibited a bull-flattening move as a result of

long-term yields falling faster than those on the short end.

Falling long-term yields sometimes signal investor concern over

a downturn in the economy.