Treasury yields slide as Russia invades Ukraine

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The U.S. Treasury building is seen in Washington, September 29, 2008. REUTERS/Jim Bourg/File Photo

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  • Treasury yields trim losses after initial steep decline
  • Safe-haven demand seen stronger in Europe than U.S.
  • Treasury sells $50 bln of 7-year notes

NEW YORK, Feb 24 (Reuters) - Investors piled into U.S. government debt on Thursday, pushing Treasury yields sharply lower after Russia invaded Ukraine, but early declines later narrowed as investors assessed the assault's impact on the economy and capital markets.

U.S. President Joe Biden hit Russia with a wave of sanctions after Ukraine reported troops poured across its borders and landed on its coast in the biggest attack by one country against another in Europe since World War Two. read more

World stock markets initially fell hard and investors fled to safe havens such as U.S. Treasuries and gold. But Wall Street rallied after Biden spoke and declines in Treasury yields narrowed, with the 30-year note turning positive.

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"It’s too early to gauge or read too much into the market's reaction," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.

Markets will be volatile in coming days and weeks "until we get more clarity on what happens in the U.S., internationally as well as the conditions on the ground," Rajappa said.

The yield on 10-year Treasury notes fell 1 basis points to 1.967%. Earlier U.S. benchmark slid to 1.846%, on track for its biggest daily drop since late November.

The U.S. dollar strengthened , up almost 1% against major currencies, and oil , rose more than 7% before trimming gains along with risk assets.

If the Russian incursion is contained to Ukraine and does not cross into any NATO-related country, tensions likely will shift, especially for U.S. assets, said Kevin Flanagan, head of fixed income strategy at WisdomTree Investments.

"In the near term, uncertainty will reign. You will see volatility in the market that will result in a back-and-forth flight-to-quality, safe-haven trade," Flanagan said.

While the invasion of Ukraine is of a far more different scale than Russia's move into Crimea in 2014, it is still more of a Euro-centric issue at the moment, Flanagan said.

"It won't affect U.S.-based behavior for consumers and for businesses unless things spiral into another phase," he said.

A closely watched part of the yield curve measuring the gap between yields on two- and 10-year Treasuries , seen as an indicator of economic expectations, was at 39.7 basis points, up slightly from previous days.

History has shown over the past 50 years that geopolitical events rarely have a long-term sustainable impact on capital markets, said Stan Shipley, strategist at Evercore ISI.

"They do move some sectors, whether you’re talking about financial, banking or energy prices," Shipley said. "But the trends we were seeing will probably continue after a short-term pause."

The U.S. Federal Reserve, which will hold its next policy meeting on March 15-16, has preferred in the past to delay major policy decisions until uncertainty driven by geopolitical risks has diminished, Goldman Sachs said.

But the current situation is different as inflation risk has created a more urgent reason to tighten, though uncertainty has lowered the odds of a 50-basis-point interest rate hike in March, Goldman said. But Goldman said it sees rates steadily rising by 25 basis points at upcoming meetings.

Money markets priced in an 16.5% probability of a 50-basis-point rate hike in March, or less than half the odds of such an increase as were registered on Wednesday.

The Ukraine invasion complicates the Fed's policy outlook as energy and some grains prices will likely rise further if the attack deepens, said John Vail, chief global strategist at Nikko Asset Management.

"The silver lining is that the decline in risk markets has helped prevent bond yields from rising to new yearly highs," he said.

Across the U.S. Treasury curve, yields were sharply lower but later pared declines. The two-year note fell 3.2 basis points to 1.568%.

The Treasury's sale of $50 billion in seven-year notes was strong, with the yield at 1.905%. The yield later rose to 1.946%.

In Europe, Germany's 10-year yield, the benchmark for the euro area, gradually trimmed losses toward the end of the session.

As investors rushed to protect against inflation risks, yields on inflation-linked bonds fell.

The yield on the 10-year Treasury Inflation-Protected Securities (TIPS) was last at 2.574%, indicating that the market sees inflation averaging about 2.6% a year for the next decade.

US Treasury yields slide as Russia launches Ukraine invasion

The breakeven rate on five-year TIPS was last at 3.028%.

The U.S. dollar five-years forward inflation-linked swap , seen by some as a better gauge of inflation expectations due to possible distortions caused by the Fed's quantitative easing, was last at 2.358%.

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Reporting by Herbert Lash; additional reporting by Dhara Ranasinghe, Sujata Rao and Yoruk Bahceli in London; Editing by Marguerita Choy and Leslie Adler

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