* Early worry-driven gains moderate in late trading
* Surprisingly strong U.S. productivity data shrugged off
* German bund 10-year rate falls for third day (Adds late prices, German bond yields decline)
By Michael Connor
NEW YORK, Aug 8 U.S. Treasuries yields on Friday hit 14-month lows on anxious buying driven by American airstrikes against Islamist militants in Iraq before U.S. debt prices eased on news that Russia was winding up military exercises near the Ukraine border
The air strikes ordered by President Barack Obama had fueled investor worries already heightened by the Ukraine crisis, tit-for-tat economic sanctions between Russia and the West, and Argentina's unresolved debt default.
Fighting also resumed in Gaza between Palestinian militants and Israel.
Yields on benchmark Treasury 10-year notes, which topped 2.50 percent on Tuesday, dipped on Friday as low as 2.349 percent before price gains eased in late New York trading. That 2.349 percent level on the issue was last seen during June 2013, according to Reuters data.
The 10-year was last up 2/32 in price and yielding 2.42 percent.
"It's a big flight-to-quality trade," said Charles Comiskey, head of Treasury trading for Scotia Bank in New York. "It's a rudderless, leaderless world everywhere. There is a lot of fear, and the fear is driving people to the Treasury market."
Thirty-year Treasury bonds also rose again, with yields falling to as little as 3.178 percent, its lowest since June 2013. The long bond last traded up 4/32 for a yield of 3.23 percent.
Price gains in shorter maturities were smaller in early trading, with seven-year and many other intermediate and short-term issues posting small losses late on Friday.
With investors focused on geopolitical matters, Treasuries trading is little affected by economic data, strategists and portfolio managers say.
On Friday, price gains pulled back only briefly on better-than-forecast data showing a 2.5 percent increase in U.S. productivity growth during the second quarter. The report bolsters arguments that Federal Reserve policymakers will raise interest rates sooner than investors believe.
"I don't think you have any fundamentals behind it," Comiskey said of this week's rally in Treasuries. "With our economy the way it is and Fed policies, I don't think you can make a case that we really should be here."
Treasuries have also benefited from declines in European bond yields that make U.S. payouts more valuable.
German Bund yields hit fresh lows for a third consecutive day on Friday as the increased tensions in the Middle East and Ukraine made investors cautious. German 10-year yields fell 2.4 basis points to 1.048 percent, having hit a record low of 1.024 percent earlier. (Reporting By Michael Connor in New York; Editing by Jonathan Oatis)