January 6, 2020 / 3:52 PM / 21 days ago

TREASURIES-Yield curve flattens on Iran tensions

NEW YORK, Jan 6 (Reuters) - The Treasury yield curve was flatter on Monday morning as heightened tensions between the United States and Iran continued to boost demand for safe-haven assets.

The benchmark 10-year yield has fallen 5.36% since the close on Jan. 2, just before an overnight U.S. air strike in Baghdad ordered by President Donald Trump killed Qassem Soleimani, Tehran’s most prominent military commander. It was last down 0.3 basis point, but a rise in two-year yields flattened the yield curve to 24.6 basis points from 30.6 at last Thursday’s close.

Iraq’s parliament called on Sunday for U.S. and other foreign troops to leave amid a growing backlash against the U.S. air strike. The killing of Soleimani, the architect of Iran’s drive to extend its influence across the Middle East, has stoked concern around the globe that a broader regional conflict could erupt.

Other safe-haven assets have benefited, like the Japanese yen, which is 0.36% higher against the U.S. dollar at 108.18. Meanwhile, risk assets like the major U.S. stock indexes have been hit.

“I think overall the main theme for the foreseeable future is going to be geopolitical,” said Justin Lederer, Treasury analyst and trader at Cantor Fitzgerald, “There’s no timeline and definitely a lot of uncertainty - much more than Brexit last year.”

Beyond geopolitical tension, the other primary theme this week, said Lederer, is new bond supply - both from the Treasury Department and in the investment grade corporate market. Treasury on Monday will auction off $78 billion in new 13- and 26-week bills. On Tuesday, it will sell $38 billion of new three-year notes; on Wednesday, $24 billion of 10-year notes; and on Thursday, $16 billion of 30-year bonds.

Heightened geopolitical tension is likely to keep demand for the new supply elevated.

“Given the real mounting risks, I think there will be decent buying of U.S. rates, but with that said... it’s going to be a tough setup with the possibility of a headline at any point,” said Lederer.

The short end of the yield curve was higher, with the two-year yield up 1.3 basis points to 1.539%. But the two-year yield, which reflects investor expectations of interest rate hikes is unlikely to move much given that the Federal Reserve is not currently forecast to move rates in the near term.

The probability the Fed will cut rates from the current 1.50-1.75% range does note rise above 50% until September, according to CME Group’s FedWatch tool.

Reporting by Kate Duguid; Editing by Andrea Ricci

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