Bond Report: Treasury yields rebound as Mideast tensions fail to stoke fresh bids for government bonds

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Treasury yields gained altitude on Monday, bouncing off their lows, as investors appeared to look past tensions between U.S. and Iran, even as the Middle East powerhouse pledged to retaliate following a deadly drone strike against one of their top generals on Friday.

What are Treasurys doing?

The 10-year Treasury yield TMUBMUSD10Y, +1.17% rose 2.2 basis points to 1.809%, after plumbing an intraday low of 1.762%, while the 2-year note rate TMUBMUSD02Y, +0.25% was up 2.4 basis points to 1.547%. The 30-year bond yield TMUBMUSD30Y, +1.83%  climbed 3.1 basis points to 2.280%. Bond prices move in the opposite direction of yields.

What’s driving Treasurys?

The U.S. drone strike and killing of Qassem Soleimani, leader of the foreign wing of Iran’s Islamic Revolutionary Guard Corps, has ratcheted tensions in the Middle East. With regional powerhouse Iran promising to launch devastating attacks against the U.S., investors are still trying to gauge the possibility of a fierce conflict between the two sides.

Later, President Donald Trump threatened sanctions against Iraq after Baghdad said it could order U.S. troops out of the country. After Iran’s leaders vowed to hit back against the U.S. for Soleimani’s killing, Trump also promised to retaliate against any Iranian response.

But risk assets appeared to shrug off the geopolitical concerns, with the S&P 500 SPX, +0.35% ending with gains on Monday after initially falling at the opening bell. The gradual improvement in investor sentiment by the end of the trading session helped to sap demand for government paper, allowing yields to also move higher.

See: U.S.-Iran tensions will spark increased volatility — here’s how to play stocks, fund manager says

Meanwhile, former Fed Chairman Ben Bernanke said the U.S. central bank had enough tools to combat the next recession at the American Economic Association’s annual meeting in San Diego. Bernanke suggested quantitative easing and forward guidance could make up for the lack of room to cut benchmark interest rates.

In economic data, Markit reported its purchasing managers index for the U.S. services sector rose to a reading of 52.8 in December, from 51.6 in November.

Read: Fed has the tools it needs to fight the next recession, Bernanke says

What did market participants’ say?

“With a nod to the potential for another spike in geopolitical uncertainty, the price action on Monday actually left us with the opposite takeaway as there was reluctance on the part of the market to push the rally meaningfully beyond 1.75%,” wrote Jon Hill, an interest-rates strategist for BMO Capital Markets.

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