TREASURIES-Yields drop after U.S. kills top Iranian commander

 (Adds data, rumored air strike, Fed minutes; 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
    The market reaction is in "response to the increase in
geopolitical tensions," said Jon Hill, an interest rate
strategist at BMO Capital Markets in New York.
    Yields came off their overnight lows as some investors bet
that further escalation between the two countries may not
necessarily be forthcoming. 
    But the bonds saw renewed buying after data showed that the
U.S. manufacturing sector contracted in December by the most in
more than a decade.
    Order volumes crashed to near an 11-year low and factory
employment fell for a fifth straight month.
    Market participants had expected that weakness in the sector
may stall after the United States and China last month agreed to
the first phase of a trade deal.
    There was a fresh wave of buying on Friday afternoon,
sending yields to session lows, on unconfirmed reports on social
media of a missile attack on a U.S. military base in Iraq.
Officials later denied these reports.
    Benchmark 10-year note yields were last at
1.799%, after falling as low as 1.788%, which was the lowest
since Dec. 12. They closed at 1.882% on Thursday.
    The release on Friday of minutes of the Federal Reserve's
final policy meeting of 2019 showed policymakers agreed that
interest rates were likely to stay on hold for "a time" as the
U.S. central bank set its sights on a new articulation of its
monetary policy framework.
    The minutes of the Dec. 10-11 policy meeting also showed
policymakers were preparing to discuss changes to the way the
Fed manages liquidity in financial markets, including a possible
standing repurchase facility.
    Major economic releases next week include the employment
report for December on Friday.
      January 3 Friday 2:19PM New York / 1919 GMT
                               Price        Current   Net Change
                                            Yield %   (bps)
 Three-month bills             1.4875       1.5177    -0.015
 Six-month bills               1.505        1.5416    -0.036
 Two-year note                 100-52/256   1.5206    -0.054
 Three-year note               100-64/256   1.5376    -0.062
 Five-year note                100-192/256  1.5928    -0.077
 Seven-year note               100-60/256   1.7142    -0.084
 10-year note                  99-144/256   1.7985    -0.084
 30-year bond                  102-96/256   2.2651    -0.075
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         9.00        -1.00    
 U.S. 3-year dollar swap         4.50        -1.25    
 U.S. 5-year dollar swap         1.75        -0.50    
 U.S. 10-year dollar swap       -4.00        -0.50    
 U.S. 30-year dollar swap      -31.75        -1.00    


 (Reporting by Karen Brettell; Editing by Andrea Ricci and
Leslie Adler)