(Adds quotes, data outlook, updates prices) By Karen Brettell NEW YORK, Jan 3 (Reuters) - U.S. Treasury yields fell sharply on Friday on safety buying after a U.S. air strike killed Iran Quds Force chief Qassem Soleimani, increasing tensions between the two countries. The Pentagon said on Thursday that Soleimani was actively developing plans to attack Americans in Iraq and the Middle East. "The (price) rally is a perfectly expected response to the increase in geopolitical tensions," said Jon Hill, an interest rate strategist at BMO Capital Markets in New York. Still, yields came off their overnight lows as some investors bet that further escalation between the two countries may not necessarily be forthcoming. "The partial retracement indicates a willingness to look through these kind of spikes in tensions," Hill said. "For the past several years fading these sharp spikes in escalation has been the winning trade, the question is is this time different?" Benchmark 10-year note yields were last 1.821%, after falling as low as 1.795% overnight, which was the lowest since Dec. 12. They closed at 1.882% on Thursday. Friday's manufacturing data will also be watched for any indications of improvement after the United States and China last month agreed to the first phase of a trade deal. Bond yields rose in December as risk appetite improved on optimism the United States and China would de-escalate their trade war, which has been blamed for slowing global growth. January 3 Friday 8:53AM New York / 1353 GMT Price Current Net Change Yield % (bps) Three-month bills 1.5 1.5305 -0.002 Six-month bills 1.5175 1.5545 -0.023 Two-year note 100-44/256 1.5366 -0.038 Three-year note 100-52/256 1.5539 -0.046 Five-year note 100-166/256 1.614 -0.056 Seven-year note 100-20/256 1.7381 -0.060 10-year note 99-92/256 1.8212 -0.061 30-year bond 102-8/256 2.2808 -0.059 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 9.25 -0.75 spread U.S. 3-year dollar swap 5.00 -0.75 spread U.S. 5-year dollar swap 1.75 -0.50 spread U.S. 10-year dollar swap -4.00 -0.50 spread U.S. 30-year dollar swap -31.75 -1.00 spread (Reporting by Karen Brettell; Editing by Chizu Nomiyama and Andrea Ricci)
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