TREASURIES-US yields retreat on Mideast worries, trading just under 5%

(Adds chart) By Davide Barbuscia NEW YORK, Oct 20 (Reuters) - U.S. Treasury yields, which hit new highs late on Thursday on renewed fears that interest rates will remain high for long, retreated slightly on Friday as investors looked for safety in bonds amid fears of a widening Middle East war. The 10-year Treasury yield, which moves inversely to the price, was briefly bid above 5% on Thursday for the first time since July 2007, touching 5.001%. That came after Federal Reserve Chair Jerome Powell said stronger-than-expected U.S. economic activity might warrant tighter financial conditions. But yields - which move inversely to prices - declined on Friday as a full-scale Israel 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. "I think 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. Yields on the 10-year note were at 4.941% while two-year yields were at 5.1%, seven basis points lower than on Thursday. On the long end of the Treasury curve, 30-year yields were unchanged at around 5.1%. Despite Friday's consolidation, 10-year yields remained on track for the biggest weekly increase since April 2022 after a brutal week of bond-market selling. Powell's speech before the New York Economic Club on Thursday, 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 recent sell-off had more room to run, and at what level long-term yields could peak. "While we view Treasuries (particularly 10s) as cheap from a longer-term perspective, it’s difficult to have enough short-term conviction to grab the proverbial falling knife given the speed and severity of the price action," BMO Capital Markets analysts said in a Friday note. 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 an economic slowing, and that could open the door to easier monetary policy late next year. BofA Global Research said on Friday it now expects the U.S. Federal Reserve to deliver a 25-basis-point rate hike in December instead of November. Fed funds future traders continued to reduce their bets that the Fed will hike rates once more this year. A November hike was almost completely priced out, while a 25 basis points hike in December had a 21% probability, down from 30% on Thursday, CME Group data showed. For next year, the consensus among 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 long, partly because of rising fiscal deficits and higher government bond supply. October 20 Friday 10:11AM New York / 1411 GMT Price Current Net Yield % Change (bps) Three-month bills 5.3125 5.4713 -0.016 Six-month bills 5.3075 5.5414 -0.019 Two-year note 99-208/256 5.101 -0.070 Three-year note 99-34/256 4.9413 -0.088 Five-year note 98-228/256 4.8799 -0.081 Seven-year note 98-32/256 4.9471 -0.071 10-year note 91-200/256 4.9414 -0.047 20-year bond 88-140/256 5.3164 -0.018 30-year bond 85-32/256 5.1008 -0.001 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 0.00 0.00 spread U.S. 3-year dollar swap 0.00 0.00 spread U.S. 5-year dollar swap 0.00 0.00 spread U.S. 10-year dollar swap 0.00 0.00 spread U.S. 30-year dollar swap 0.00 0.00 spread (Reporting by Davide Barbuscia; Editing by Nick Zieminski and Jonathan Oatis)