Treasury yields retreat as investors seek safety in bonds on rising Middle East tensions

What’s happening

• The yield on the 2-year Treasury note
  BX:TMUBMUSD02Y
  fell 4.4 basis points to 5.025% from 5.069% on Thursday.

• The yield on the 10-year Treasury note 
  BX:TMUBMUSD10Y
  shed 9.8 basis points to 4.612% from 4.710% on Thursday.

• The yield on the 30-year Treasury 
  BX:TMUBMUSD30Y
   declined by 10.9 basis points to 4.761% from 4.870% on Thursday.

What’s driving markets

Geopolitical tensions are once again front and center as Israel urges the evacuation of northern Gaza ahead of further military action. Israel warned Gaza residents to evacuate the north of the country, sending crude-oil prices higher as traders worried about the fallout from an escalating conflict.

Treasurys benefited as investors sought safety in U.S. government debt, a day after a selloff triggered by two different events. The first was the release of the U.S. CPI Index for September, which showed that consumer prices increased by 0.4% last month or more than expected by economists. The second was a 30-year bond auction that fetched the highest yield relative to the market since 2007, reflecting weak demand for the longest-term U.S. debt.

What analysts are saying

“This week’s Consumer Price Index (CPI) reinforced the investment theme for inflation and Fed policy that the outlook remains higher for longer for inflation, interest rates and the U.S. dollar,” sad John Silvia, founder and chief executive of Dynamic Economic Strategy. Overall CPI “has moderated but at a pace disappointing to financial markets.”

“The Price Pressures Measure, published by the Federal Reserve Bank of St. Louis, signals a 76 percent probability that the personal consumption deflator will exceed the Fed’s 2.5% target one-year from now. This is a very cautionary signal that the Fed is likely to maintain, or even raise, its fed funds target to achieve lower inflation,” Silvia wrote in a note.