TREASURIES-Yields fall on Iran concerns, Waller says Fed should cut rates

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Iran war concerns boosts demand for Treasuries

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Trump to decide on Iran response in next two weeks

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Fed's Waller says bank should consider cutting rates

(Updated in New York afternoon time)

By Karen Brettell

June 20 (Reuters) - U.S. Treasury yields fell on Friday as concerns over the conflict in Iran boosted demand for safe haven bonds and after Federal Reserve Governor Christopher Waller said the U.S. central bank should consider cutting rates at its next meeting.

Demand for Treasuries ebbed earlier in the session on optimism that the U.S. would find a diplomatic solution to the Israel-Iran conflict. The White House said on Thursday that President Donald Trump will decide on potential U.S. involvement in the next two weeks.

But that sentiment soon faded and markets turned more risk averse. Iran said on Friday it would not discuss the future of its nuclear program while under attack by Israel.

U.S. markets are catching up after being closed on Thursday for the federal Juneteenth holiday.

Fed funds futures traders, meanwhile, raised bets that the U.S. central bank will cut rates by 50 basis points this year following comments by Waller. They are now pricing in 51 basis points of cuts by December, up from 46 basis points earlier on Friday.

Waller said that an imminent rate cut was merited given recent tame inflation data and the fact that any price shock from import tariffs will be

short-lived

.

"There has been a marginal upward shift in Fed rate cut bets following Governor Waller's dovish comments and some further weakening in data," said analysts at Action Economics.

A measure of future U.S. economic activity fell in May for the

sixth straight month

and triggered a recession signal, held down by consumer pessimism, weak new orders for manufactured goods, an uptick in jobless benefits claims and a drop in building permit applications.

The Fed held interest rates steady and policymakers signaled borrowing costs are still likely to fall in 2025 on Wednesday. But Fed Chair Jerome Powell cautioned against putting too much weight on that view, and said he expects "meaningful" inflation ahead as consumers pay more for goods due to the Trump administration's planned import tariffs.

The yield on benchmark U.S. 10-year notes was last down 2 basis points at 4.375%. The interest-rate-sensitive 2-year note yield fell 3.5 basis points to 3.906%.

The yield curve between 2-year and 10-year notes steepened by around 2 basis points to 47 basis points.

The Treasury Department will sell $183 billion in short- and intermediate-dated coupon-bearing debt next week, including $69 billion in two-year notes on Tuesday, $70 billion in five-year notes on Wednesday and $44 billion in seven-year notes on Thursday.

(Reporting by Karen Brettell Editing by Rod Nickel and Marguerita Choy)