TREASURIES-Safety trade intact for U.S. Treasuries on geopolitical tensions

Fri Jul 18, 2014 4:39pm EDT

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(Adds comment, Obama statement, updates prices)

By Daniel Bases

NEW YORK, July 18 (Reuters) - U.S. Treasuries held steady on Friday, taking in stride a weaker-than-expected U.S. consumer sentiment survey and holding onto the safe-haven flows stemming from the escalation of tensions in Ukraine and Israel in the last 24 hours.

The world remained on edge after the downing on Thursday of a Malaysian passenger jet over an area of eastern Ukraine where the government has been fighting with Moscow-backed separatists.

Treasury prices swooned and then recovered after President Barack Obama addressed the tragedy and outlined what steps were being taken between governments.

Obama demanded that Russia stop supporting separatists in eastern Ukraine, but he also said he did not see a U.S. military role in the roiling conflict beyond reassurances it has already provided to the NATO alliance.

"I think it was Obama's speaking. What it did was to take away the worry about anything blowing up this weekend. People took some profits to remove their insurance as they don't feel there is an escalation on the way," said William Larkin, fixed income portfolio manager at Massachusetts-based Cabot Money Management, which manages $500 million.

Israel's launching of a ground offensive into Gaza on Thursday to stop Hamas militants from firing rockets indiscriminately into Israel and to destroy their smuggling tunnel network kept geopolitical tensions high.

Benchmark 10-year U.S. Treasuries were little changed, down 3/32 of a point in price, with a yield up to 2.48 percent, according to Thomson Reuters data. The yield briefly reached above 2.50 percent.

The 30-year Treasury bond was off 1/32 of a point in price, leaving the yield at 3.29 percent. On Thursday, the yield fell to a one-year low of 3.26 percent.

The yield spread between 10-year and 2-year Treasuries is just over 200 basis points, the narrowest since June of last year.

CONSUMER SENTIMENT SOFT

The preliminary July Thomson Reuters/University of Michigan reading of consumer sentiment showed the index dropping to 81.3, below both the consensus analyst expectation of 83 and the final June read of 82.5.

The data point to a U.S. economy, where consumer spending accounts for roughly two-thirds of economic activity, that is still playing it cautious even with evidence of improvement in job creation.

"The data is not doing much today, even if it is slightly weaker. Clearly what is on the market's mind is the tragic events unfolding around the world as we go into the weekend and people not wanting to be exposed. We would expect a continued flight to quality," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond fund in Baltimore, Maryland.

A typical flight-to-quality move would be to send money into Treasuries in the two-year to five-year range, Stith said. However, in the current market environment, money is flowing into the longer-dated maturities and making for a flatter yield curve. (Additional reporting by Richard Leong in New York; Editing by Paul Simao and Chris Reese)

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