Bonds

Treasury yields slide after US strike kills top Iranian military leader in Baghdad

Treasury yields sank Friday as investors fled for safer assets in the aftermath of a U.S. airstrike in Baghdad that killed Iran's top military commander and escalated an already-tense power struggle between Washington and Tehran in the Middle East.

Yields on long-term U.S. debt, long considered a safer investment versus equities, fell sharply after the Pentagon confirmed its drone strike killed General Qasem Soleimani, leader of special forces unit of Iran's elite Revolutionary Guards and a key figure in Iranian and Middle Eastern politics.

The yield on the benchmark 10-year Treasury note sank 8 basis points to 1.799% from highs around 1.9% in the previous session, while the rate on the 30-year bond fell 7 basis points to 2.266%. Bond yields fall as prices rise.

"It's still too soon to offer any meaningful prediction on how this all plays out, but investors are clearly incorporating a degree of concern that further disruptive escalations may be in the offing," wrote Ian Lyngen, head of rates strategy at BMO Capital Markets.

"The market response has largely been an intuitive flight to quality, but the reaction in breakevens appears undersized," he added.

The 10-year yield extended its decline on Friday after the Federal Reserve minutes showed officials signaled interest rates would remain on hold through 2020. 

The killing of Soleimani, credited for having a hand in designing nearly every significant Iranian military and intelligence operation over the past two decades, represented a shocking blow for Tehran as geopolitical anxieties flare throughout the region.

Iranian Quds Force commander Qassem Soleimani in Tehran, Iran on September 18, 2016.
Press Office of Iranian Supreme Leader | Anadolu Agency | Getty Images

"At the direction of the President, the U.S. military has taken decisive defensive action to protect U.S. personnel abroad by killing Qasem Soleimani, the head of the Iranian Revolutionary Guard Corps-Quds Force, a U.S.-designated Foreign Terrorist Organization," the U.S. Department of Defense said in a statement.

"General Soleimani was actively developing plans to attack American diplomats and service members in Iraq and throughout the region," it added. "General Soleimani and his Quds Force were responsible for the deaths of hundreds of American and coalition service members and the wounding of thousands more."

The U.S. attack also marked the latest in a recent string of U.S.-Iranian hostilities in the Middle East that began with the death of an American contractor in Iraq last month. At the time, the U.S. military blamed the American's death on an Iran-backed Iraqi militia and conducted airstrikes on Sunday that killed 25 fighters in the region.

That led to the breach of the U.S. Embassy in Baghdad on Tuesday by dozens of angry Iraqi militia members, who set fire to a reception area before being controlled using tear gas.

Iran's Foreign Minister has tweeted that the U.S. bears responsibility for all consequences of its "rogue adventurism," while Fars News Agency reported a spokesman as saying that Iran's top security body will meet to discuss Tehran's response.

"A #SevereRevenge awaits the criminals who have stained their hands with his & the other martyrs' blood last night," Iranian Supreme Leader Ayatollah Ali Khamenei, the country's most powerful leader, wrote on Twitter Friday morning. "Martyr Soleimani is an Intl figure of Resistance & all such people will seek revenge."

The U.S. attack in Baghdad early Friday morning sent crude prices soaring as much as 4%, with Brent futures trading around $68.80 a barrel.