(Bloomberg) -- Anxiety over what comes next in the conflict between the U.S. and Iran is tethering Treasury yields, offsetting more positive signs on the economic front.
The 10-year U.S. benchmark yield slumped as much as 11 basis points during Asia trading Wednesday after Iran fired a volley of missiles on U.S.-Iraqi airbases in retaliation for an American airstrike that killed a top Iranian general. That flight-to-quality move gave way to a sell-off on hopes that the escalation would stop there, following what was interpreted as a measured tweet from President Donald Trump, promising a statement in the U.S. morning.
The benchmark is now little changed below its highest level this week, at 1.81%. The roundtrip in yields is fresh evidence of how geopolitical events are counteracting the upward pressure on rates from a brighter U.S. growth outlook. Wednesday brought solid labor data, as a report showed companies added more jobs than expected in December, ahead of what’s expected to be a healthy payrolls report from the government Friday. That follows Tuesday figures indicating stronger-than-forecast expansion in the U.S. service sector.
“Barring the escalation in geopolitical tensions I absolutely think that yields would be higher,” said Mark Cabana, head of U.S. rates strategy at Bank of America Corp (NYSE:BAC).
Additional pressures in favor of higher U.S. yields are the recent improvement in Chinese manufacturing data, suggesting global growth may have troughed. The yuan this week reached the strongest level since August.
There’s also a slate of U.S. government debt auctions to absorb. The Treasury will sell $24 billion of 10-year notes at 1 p.m. Washington time, with 30-year bonds ahead Thursday.
That said, Cabana doesn’t see yields rebounding more than about 10 basis points on a reassuring response from the U.S. president in his 11 a.m. ET address.
“What’s been happening between the U.S. and Iran formalizes a proxy war between the two countries and even if there’s a more tempered response from the president today that probably doesn’t completely solve the issues at hand,” he said. “Heightened geopolitical risk will likely persist.”