January 8, 2020 / 8:07 PM / a month ago

TREASURIES-U.S.-Iran de-escalation sends yields higher

(New throughout)

By Kate Duguid

NEW YORK, Jan 8 (Reuters) - Treasury yields rose on Wednesday after tensions between the United States and Iran eased and investors moved out of safe-haven assets as risk appetite returned.

In an address from the White House, President Donald Trump said the United States did not necessarily have to respond militarily to Iranian missile attacks on military bases housing U.S. troops in Iraq overnight, backing away from days of angry rhetoric against Iran as the two countries tried to defuse a crisis over the American killing of Iranian commander Qassem Soleimani.

The 10-year yield was last up 5 basis points to 1.876%, nearly 20 basis points above the low it hit overnight following the Iranian strike.

“We got the knee-jerk move last night. We went back down to support levels of 1.70% on the U.S. 10-year. This was the risk relief rally on the back of basically nothing coming out of the Iran retaliation,” said Jacob Oubina, senior U.S. economist at RBC Capital Markets.

“I think once Trump spoke and suggested that this is basically done for now, risk took off. We’re back to the all-time highs in the S&P and accordingly, so-called safe assets sold off.”

Yields across maturities have moved roughly in step with the 10-year since late Tuesday. The two-year was last up 3.9 basis points to 1.585% having hit a three-month low in overnight trade of 1.452%.

Other safe-haven assets like the Japanese yen had also retraced its overnight move in which it rose to a three-month high of 107.63 yen per dollar.

The return of risk appetite dented demand in the auction of $24 billion new 10-year notes by the Treasury Department on Wednesday afternoon.

“Trump’s press conference was close to noon and the auction was at 1 p.m.,” said Oubina at RBC Capital Markets.

“I think that makes for pretty sloppy conditions for an auction when you have such a violent move an hour before the auction. It’s going to create some dislocations there. I don’t think that’s indicative of anything problematic in the Treasury market.”

The 10-year auction saw soft demand with a tail of 1.5 basis points. Direct and indirect bidders took a combined 71.3% of the pool, versus an average of 75.9%, leaving dealers to soak up 28.7%. (Reporting by Kate Duguid; Editing by David Gregorio and Marguerita Choy)

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