(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 East. 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 Change (bps) U.S. 2-year dollar swap 9.00 -1.00 spread U.S. 3-year dollar swap 4.50 -1.25 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 Andrea Ricci and Leslie Adler)
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