Middle East tensions send US Treasury yields lower

NEW YORK – US Treasury yields fell on Tuesday as Iran launched missiles at Israel which boosted demand for safe-haven assets, but were off earlier lows on hopes any further escalation was not imminent.

Iran fired a salvo of ballistic missiles at Israel on Tuesday in retaliation for Israel’s campaign against Tehran’s Hezbollah allies in Lebanon, while Israel vowed a “powerful response.”

A warning by the US that the launch was likely pushed yields to session lows, with the 10-year dropping to 3.696%, its lowest since Sept. 18, and the 2-year falling to 3.572%.

US National Security Adviser Jake Sullivan said the strike appeared to have been defeated and Iran and its proxies will continue to be monitored for further threats.

The yield on the benchmark US 10-year Treasury note was down 6.3 basis points to 3.739%.

“It was a reaction to see what the response was going to be based on the information, based on some of the headline news, everybody was on kind of standby, and then once you started to see things play out the market was able to settle down,” said Jim Barnes, director of fixed income at Bryn Mawr Trust in Berwyn, Pennsylvania.

“Once you have your initial response, now we’ll just wait and see and hopefully this pause will hold and then the market will change their attention now back to some of the morning data, which obviously has more and longer-term implications for yields.”

In US economic data, the Job Openings and Labor Turnover Survey, or JOLTS report, showed job openings, a measure of labor demand, rebounded by 329,000 to 8.040 million, but hiring was soft and consistent with a cooling labor market.

The manufacturing sector held steady at weaker levels in September, as the Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 47.2 last month, slightly below the 47.5 estimate of economists polled by Reuters. A PMI reading below 50 indicates a contraction in the manufacturing sector.

The yield on the 30-year bond fell 5.5 basis points to 4.078%.

Yields had risen on Monday after Federal Reserve Chair Jerome Powell suggested the central bank will take a gradual approach in cutting interest rates.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 12 basis points after dropping to a positive 9.6, its flattest since Sept. 19.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, shed 3.4 basis points to 3.617%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.094% after closing at 2.086% on Sept. 30.

The 10-year TIPS breakeven rate was last at 2.188%, indicating the market sees inflation averaging about 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Chizu Nomiyama)