TREASURIES-Safe-haven demand drives bond rally; 10-year yield slides below 4%

*

US 10-year yields hit lowest since November

*

Belly of the curve outperforms, with multi-month lows in yields

*

US 2/10 yield curve flattens again

*

US PPI hotter than expected, but impact is brief

By Gertrude Chavez-Dreyfuss

NEW YORK, Feb 27 (Reuters) - U.S. Treasuries ascended on Friday, buoyed by safe-haven demand as investors remained on edge over geopolitical tensions in the Middle East, while a selloff on Wall Street further dampened risk appetite.

The benchmark 10-year yield, which moves inversely to prices, fell below 4% for the first time since late November, while yields on the belly of the curve - five-year and seven-year notes - also dropped to multi-month lows.

The U.S. five-year yield slid to its lowest since mid-October, while that of seven-year notes sank to a four-month trough.

Data showing U.S. producer prices increased more than expected in January briefly pared gains in Treasuries, but the overarching theme remains to buy U.S. government debt.

SHIFTING RISK SENTIMENT

"Risk sentiment has shifted significantly, mostly due to geopolitical jitters and AI fears," said Angelo Manolatos, macro strategist at Wells Fargo in North Carolina.

"This has caused a flight to quality bid across Treasuries and they are outperforming. You see it most predominantly in the belly of the curve, and it has persisted all month." Investors continued to fret over Iran. The United States and Iran made progress in talks over Tehran's nuclear program on Thursday, but hours of negotiation ended with no sign of a breakthrough that could avert potential U.S. strikes after a massive military buildup. The two sides plan to resume negotiations soon after consultations in their countries' capitals, with technical-level discussions scheduled to take place next week in Vienna, Omani Foreign Minister Sayyid Badr Albusaidi said on Friday. Against that backdrop, worries about AI upending software companies' business models and fueling massive job losses in many entry-level and computer-facing jobs have caused a selloff in tech stocks. That has continued to spook bond investors.

In late morning trading, the benchmark 10-year yield fell 4.2 basis points to 3.975%, after hitting its lowest since late November. On the month, the yield plunged 27 bps, on track for its largest monthly decline in a year.

U.S. 30-year yields also slid to a four-month low, and were last down 3.2 bps at 4.637%. For February, 30-year yields fell 24 bps, on pace for their largest monthly drop since February 2025.

BELLY OF CURVE IN FOCUS

The belly of the curve was the clear outperformer.

U.S. five-year yields were down 4.9 bps at 3.534% . On the month, yields plummeted 26 bps, their largest monthly drop since August.

U.S. seven-year yields also declined, down 5 bps at 3.735% . Seven-year yields have fallen this month 28 bps, their biggest monthly slide in a year.

On the front end of the curve, the two-year yield, which reflects rate expectations, declined 4 bps to 3.408%. Earlier in the session, it fell to a 10-day trough, and on the month, it was down 12 bps, on track for the largest monthly decline since November.

Treasury yields, however, pared their fall after producer prices data came in higher than expected last month. The Producer Price Index for final demand rose 0.5% last month after advancing by a downwardly revised 0.4% in December, data showed. Economists polled by Reuters had forecast the PPI gaining 0.3% after a previously reported 0.5% increase in December.

U.S. fed funds futures on Friday priced in about 59 bps of easing this year, pricing in two full rate cuts of 25 bps each. That was marginally higher than 55 bps late Thursday. The first rate cut is not expected until July or September.

In other parts of the bond market, the yield curve was slightly flatter, with the gap between two-year and 10-year yields slipping to 56.6 bps from 57.2 bps late on Thursday.

The curve has flattened in 12 of the last 13 sessions, with short-term yields remaining above those on long-term Treasuries. For February, the curve has flattened by 14 bps, the narrowest spread on a monthly basis since November 2023.

The move largely reflects expectations that the Federal Reserve may not cut interest rates as aggressively as previously thought, given the run of still-solid economic data.

(Reporting by Gertrude Chavez-Dreyfuss Editing by Rod Nickel)