Treasuries Get Respite as Middle East Risks Fan Haven Bid

Treasuries advanced with the dollar as concerns over an escalation in the Middle East conflict bolstered demand for safe-haven assets.

Treasuries Get Respite as Middle East Risks Fan Haven Bid

The yield on 10-year Treasuries slumped as much as 11 basis points to 4.52%, while a gauge of the dollar climbed as much as 0.6% to its highest since November. The move came amid unverified reports of an explosion being heard early Friday in Iran’s central city of Isfahan. Traders have been awaiting an Israeli response to Iran’s attack last weekend, with the rhetoric between the two escalating.

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“With the Middle East spiraling into a tit-for-tat escalation, long-end US Treasuries are set to rally strongly on a safe haven bid,” said Wei Liang Chang, macro strategist at DBS Bank Ltd. in Singapore. “We could see US 10-year yields easing towards 4% if Iran decides to respond to the attacks in another round of escalation.”

The haven rush comes at a time the bonds are under significant pressure from a rethink of expectations for the path of US interest rates. Benchmark yields hit their highest since November this week in response to strong economic data and hawkish remarks by Federal Reserve officials.

That included a signal from Fed Chair Jerome Powell that the central bank is in no hurry to cut rates. 

On Thursday in the US, swap rates that predict Fed decisions edged higher, pricing in a cumulative 38 basis points of rate cuts by the December policy meeting — compared with 43 basis points as of Wednesday close. An initial quarter-point cut was priced in for the November policy meeting.

“I would say that we’ve seen a material rise in US yields over recent weeks, and a lot of investors and traders, including systematic accounts, will likely be running short US bond positions,” said Andrew Ticehurst, rates strategist for Nomura Holdings Inc. in Sydney. “So there is clear risk that some of these positions will be covered, which could lead to out-sized moves.”

Australian and New Zealand government bonds followed Treasuries higher as Asian currencies tumbled and oil surged.

“This is a textbook case of flight to safety,” said Keisuke Tsuruta, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “The exchange of retaliation reminds us that the situation in the Middle East is becoming more tense, and investors are buying bonds to avoid risk.”

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