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U.S. Treasury prices rebounded on Friday as investors sought the safety of bonds amid fears of an escalating Middle East war, a day after the benchmark 10-year’s yield toyed with 5% amid renewed concerns interest rates will remain higher for longer.

The 10-year’s yield, which moves inversely to price, was briefly bid above 5% late on Thursday for the first time since July 2007, touching 5.001%. That came after Federal Reserve Chair Jerome Powell said the U.S. economy’s strength and tight labor markets might warrant tighter financial conditions.

But yields retreated on Friday as a full-scale Israeli invasion of Gaza loomed and after news that U.S. troops have been attacked in Iraq and Syria in recent days during the Israel-Hamas war.

“It’s hard to sell safe duration right now if you’re concerned about the situation in the Middle East, and the trajectory from here I think is very, very uncertain,” said Erik Weisman, chief economist at MFS Investment Management.

The 10-year’s yield slid 5.7 basis point from Thursday to 4.9307%, while two-year fell 7.2 bps to 5.0988%. On the long end of the Treasury curve, 30-year yields fell 2.2 bps to 5.0801%.

Despite Friday’s consolidation, 10-year yields were on track for the biggest weekly increase since April 2022 after this week’s brutal sell-off.

Powell’s speech at the New York Economic Club, while highlighting emerging risks in the economy and the Fed’s need to move with care as it seeks to curb inflation, left many wondering whether the plunge in prices had more room to run and at what level long-term yields could peak.

“The market is struggling with the same dynamic that the Fed is and that was apparent in Powell’s speech, which is simply the Fed has raised rates a lot, (but) we haven’t really seen that have a significant impact on underlying economic growth” said Mark Hamilton, chief investment officer at Hirtle & Callaghan in West Conshohocken, Pennsylvania.

“The market is struggling a little bit with what is the long-term sustainable real rate?” Hamilton said. “What is the rate of interest that this economy can withstand?”

Echoing some of Powell’s more dovish remarks, Federal Reserve Bank of Atlanta President Raphael Bostic said on CNBC Friday that while inflation remains too high it is coming down amid rising evidence of growth slowing that could open the door to easier monetary policy late next year.

Fed funds futures show bets that the Fed will hike rates once more this year continue to decline. A November hike was almost completely priced out, while a 25 basis points hike in December had a 24% probability, down from 39% on Wednesday, CME Group data showed. The consensus among futures traders remained for a first rate cut to happen in June.

Meanwhile, the inversion of a closely watched part of the Treasury yield curve plotting two-year against 10-year yields decreased further on Friday. It was last seen at minus 16.8 basis points - the steeper, or less inverted, it has been since August last year.

The less pronounced inversion has been driven by long-term yields rising more than short-term ones as investors expect interest rates to remain elevated for longer, partly because of rising fiscal deficits and higher government bond supply.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.464%.

The 10-year TIPS breakeven rate was last at 2.461%, indicating the market sees inflation averaging about 2.5% a year for the next decade.

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