Almost 50% of patients with myelodysplastic syndrome (MDS) are refractory to first-line hypomethylating agents (HMAs), which presents a significant clinical challenge considering the lack of options for salvage. Past work revealed that immune checkpoint molecules on peripheral myeloblasts and immune cells are up-regulated after HMA treatment. Therefore, we conducted a Phase I/II clinical trial combining guadecitabine (an HMA) and atezolizumab (an immune checkpoint inhibitor) to treat HMA-relapsed or refractory (HMA-R/R) MDS patients. This combination therapy showed median overall survival of 15.1 months relative to historical controls (4-6 months). Here, we profiled the cell composition and gene expression signatures of cells from bone marrow aspirates from trial participants with short-term (<15 months) or long-term (>15 months) survival at single-cell resolution. Long-term survivors showed a significant reduction of immunosuppressive monocytes, and an expansion of effector lymphocytes after combination therapy. Further immune profiling suggests that gamma delta T cell activation through primed dendritic cells was associated with global interferon activation in the bone marrow microenvironment of long-term survivors. Short-term survivors exhibited elevated inflammation and senescence-like gene signatures that were not resolved by combination therapy. We propose that distinct bone marrow microenvironment features, such as senescence-associated inflammation or immunosuppressive monocyte presence, could improve patient stratification for HMA and immunotherapy combinations in HMA-R/R MDS patients.