May 8, 2018 / 7:50 PM / a year ago

TREASURIES-Flight to safety as U.S. quits Iran deal drives yields down

 (Updates news, yields, analyst quotes)
    By Kate Duguid
    NEW YORK, May 8 (Reuters) - U.S. government bond yields
across maturities fell on Tuesday as demand for the safe-haven
investment increased following President Donald Trump's
announcement that the country would withdraw from its nuclear
deal with Iran.  
    But the moves were relatively muted, with the 10-year
Treasury yield reaching a weekly high of 2.987
percent, before falling to 2.974 percent, just 2 basis points
above Monday's close. That suggested markets had already priced
in the possibility of U.S. withdrawal. 
    "The market has been preparing, in a sense, for this
announcement. The combination of the changeover in the
president’s team from Tillerson to Pompeo and the appointment of
John Bolton was a signal to the market of the direction that the
administration was going," said Brian Daingerfield, macro
strategist at NatWest Markets in Stamford, Connecticut.
    In a televised speech, Trump said the United States would
pull out of a 2015 international agreement designed to deny
Tehran the ability to build nuclear weapons, and also reinstate
sanctions on Iran. The decision is likely to raise the risk of
conflict in the Middle East, upset America's European allies and
disrupt global oil supplies.
    The response in currency markets was similarly muffled, with
the dollar, which is also a safe-haven investment, up to 93.105
against a basket of six currencies, having hit a session high of
93.280 earlier in the day. The lassitude across asset classes
may also suggest investors believe there is more to be revealed
about the deal. 
    "I think right now there's still quite a bit of uncertainty
about the future of the deal even now that the U.S. has made its
intentions clear," said Daingerfield.
    The European Union has said it will continue to uphold the
accord regardless of U.S. participation. And Iran's response is
also not yet clear.  
    What's more "you could argue that President Trump being open
to the negotiation of a better deal while also hanging the risk
of sanctions over Iran… that if an agreement could still be
reached, a risky scenario could be avoided," said Daingerfield.
    The Treasury Department on Tuesday auctioned $31 billion in
three-year notes to modestly improved participation,
part of its auction of $73 billion in U.S. debt this week. The
issuance of three-year notes at auction increased by $1 billion
from April, and by $7 billion from February. 
    The two-year note's yield was last at 2.514
percent, up from 2.497 at the end of Monday's session.
  May 8 Tuesday 3:30PM New York / 1930 GMT
 US T BONDS JUN8               143-8/32     -0-10/32  
 10YR TNotes JUN8              119-116/256  -0-60/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.84         1.8744    0.039
 Six-month bills               1.995        2.0434    0.011
 Two-year note                 99-188/256   2.5135    0.016
 Three-year note               99-58/256    2.6504    0.019
 Five-year note                99-182/256   2.8126    0.029
 Seven-year note               99-168/256   2.9298    0.030
 10-year note                  98-28/256    2.9741    0.024
 30-year bond                  97-132/256   3.1287    0.009
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        26.00        -0.75    
 U.S. 3-year dollar swap        21.75        -0.75    
 U.S. 5-year dollar swap        12.25        -0.75    
 U.S. 10-year dollar swap        3.50        -0.25    
 U.S. 30-year dollar swap      -10.25         0.75    

 (Reporting by Kate Duguid; Editing by Will Dunham and Chizu
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