Yields retreat on Syria fears; curve flattest in 10 years

NEW YORK: US Treasury yields declined on Wednesday on escalating geopolitical tensions after President Donald Trump warned Russia of imminent military action in Syria over a suspected poison gas attack.

Trump declared on Wednesday that missiles "will be coming," as he lambasted Russia for standing by Syrian President Bashar al-Assad following a suspected gas attack that killed more than 40 people and affected hundreds of others.

US benchmark 10-year note and 30-year bond yields, which move inversely to prices, slid to one-week lows, while 2-year yields slipped after two days of gains.

"This is mostly geopolitical tension," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "There are concerns obviously in the Middle East and what might happen. So risks are certainly higher."

Yields, however, briefly edged higher after modestly hawkish minutes from the Federal Reserve's last policy meeting, as policymakers felt the US economy would firm further and inflation would rise in the coming months.

"These minutes have a hawkish lean," said Collin Martin, senior fixed income research analyst, at Schwab Center for Financial Research in New York. "To us, the Fed will continue to raise rates at a gradual pace."

The US yield curve flattened further on Wednesday, with the gap between US 2-year and 10-year note yields  at their narrowest in 10 years. Analysts said that reflected a scenario of a Fed raising interest rates at a time when investors think there is very little inflation in the economy.

Yields also rose after a lackluster US 10-year note auction that drew its lowest demand in nearly 1-1/2 years from so-called "indirect bidders", which include fund managers and foreign central banks.

Action Economics' Rupert noted that demand for Treasuries has been tepid over the last 12 months. This, she said, signifies the fact that the Fed has been raising interest rates and that investors expect more government bond supply on the way to finance the country's budget deficit

In afternoon trading, the US 10-year yields were down at 2.7826 percent, from 2.797 percent late on Tuesday.

US 30-year yields sank to 2.995 percent, from Tuesday's 3.017 percent.

On the front end of the curve, US 2-year yields dipped to 2.311 percent, compared with 2.315 percent on Tuesday.

Earlier data showing a rise in US core inflation for March, which was up 0.2 percent and matched February's increase rise, failed to boost yields, as headline consumer prices fell for the first time in 10 months.