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US Treasurys rise amid equity sell-off

U.S. Treasury notes and bonds traded higher on Monday, on the first trading session of 2016, as investors focused on geopolitics in the Middle East and a sharp sell-off in Chinese equities.

Yields (which have an inverse relationship with prices) on 10-year U.S. Treasurys fell to their lowest levels in a week Monday morning before reversing slightly to 2.2383 percent, from a previous close of 2.275 percent. The U.S. two-year yield hit lows of 0.992 percent and the U.S. five-year hit lows of 1.6958 percent.

Feeble manufacturing surveys in China revived concerns over the slowdown in the world's second largest economy. Fresh manufacturing PMIs on Monday showed a fall to 48.2 in December, from 48.6 in November, contracting for a tenth month and coming in below a Reuters poll forecast for 49.0.

The distinctly risk-off mood was highlighted as the Shenzhen Composite had its worst day since early 2007, closing down 8.2 percent. The Shanghai Composite ended 6.86 percent and trading on both exchanges was temporarily halted as the authorities implemented a "circuit breaker" for the first time.

In Europe, the pan-European STOXX 600 was down over 2.3 percent in morning trade with Germany's DAX slumping over 4 percent.

U.S. equities followed global stocks lower, as the major averages all fell more than 1 percent.

Meanwhile, rising tensions between Iran and Saudi Arabia provided little risk premium to oil prices on Monday. Prices had moved higher after a breakdown in diplomatic ties that could still lead to supply restrictions in the Middle East. Saudi Arabia severed diplomatic ties with Iran over the weekend after Iranian protesters stormed Saudi Arabia's embassy in Tehran Sunday following Saudi Arabia's execution of Shiite cleric Nimr al-Nimr on Saturday.

The ISM index of national factory activity also showed Monday morning that the U.S. manufacturing sector contracted further in December. San Francisco Fed President John Williams will also speak on the implementation of macroprudential policies by central banks at the AEA Annual Meeting in California at 5:30 p.m.

The event in San Francisco is on the minds of investors as the pace of interest rate hikes remain in focus. Loretta Mester, president of the Cleveland Fed, told Reuters in an interview Sunday that she did not need to see clear evidence of inflation to back more policy tightening after the Fed's initial rate hike in mid-December.

—CNBC's Patti Domm, Arjun Kharpal and Saheli Roy Choudhury contributed to this report.