US-Iran talks in focus as war fears rise
US initial jobless claims rise but better than expected
US seven-year note sale roughly in line with market forecasts
Adds comment in paragraphs 4-5, 11; results of US seven-year auction in paragraphs 15-17; updates yields
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 26 (Reuters) - U.S. Treasury prices climbed on Thursday as investors rushed for safety, rattled by mounting tensions between the U.S. and Iran and, more broadly, by the potential economic fallout from the rise of artificial intelligence.
Software stocks have been hammered in recent weeks on fears that AI could blow up established business models. Investors also worry that AI could wipe out millions of computer‑based jobs, squeeze consumer spending, and even tip the global economy into a deflationary slide.
The benchmark 10-year yield, which moves inversely to prices, fell to a three-month low, while 30-year yields slid to a more than one-week trough.
"We're hearing more about the potential negative impact from AI on certain industries and what that could be going forward," said Kevin Flanagan, head of fixed income strategy at WisdomTree.
"The conversations I've had with clients involve people asking if there is a way we can mitigate risks to some of the industries that could have unintended consequences from AI. That seems to be a narrative in the market right now."
In the very near term, Iran is also a nagging concern for bond investors.
Iran and the United States held indirect talks in Geneva on Thursday to avert a conflict over their long-running nuclear dispute. Oman, which acted as mediator during the meeting, said both parties made significant progress, after U.S. President Donald Trump had recently ordered a huge military build-up in the region.
Iran, which has said its nuclear program is peaceful, agreed in principle to accept curbs to its nuclear activities in return for the lifting of sanctions but rejects tying the talks to other issues.
"There's some fear of what's going on with Iran," said Stan Shipley, fixed income strategist at Evercore ISI in New York. "The question is: Are we going to war with Iran? So there's some flight to safety here."
In afternoon trading, the benchmark 10-year yield fell 3.2 basis points (bps) to 4.016% US10YT=RR, after hitting its lowest since late November at 4.014%.
"The macro environment is not supportive of a 10-year yield at 4% or below," said WisdomTree's Flanagan. "Some of the macro data have been good and the Fed minutes a week ago showed a Fed that is either at or near the end of this rate cycle."
U.S. 30-year yields also slid, touching a more than one-week low, and were last down 2.8 bps at 4.666% US30YT=RR.
On the front end of the curve, the two-year yield, which reflects rate expectations, declined 2.7 bps to 3.444% US2YT=RR.
AUCTION ROUGHLY IN LINE WITH FORECAST
The U.S. Treasury on Thursday sold $44 billion in seven-year notes and the result was roughly in line with expectations. The auction cleared at 3.790%, more or less matching the expected rate at the bid deadline.
The bid-to-cover ratio, a demand metric, was 2.50X, marginally higher than the six-auction average of 2.46X.
Post-auction, U.S. seven-year yields sank 4 bps to 3.772% US7YT=RR. Since the January auction, seven-year yields have declined by roughly more than 20 bps and are now trading near six-month lows.
In other parts of the bond market, the yield curve was slightly flatter on the day, with the gap between two-year and 10-year yields slipping to 56 bps US2US10=TWEB from 57.9 bps late on Wednesday. It was last at 57 bps.
The curve has flattened in 11 of the last 12 sessions as short‑term yields climbed relative to long-term Treasuries. The 2/10 gap had narrowed for 10 consecutive sessions at one stage, marking its longest tightening run since November 2015.
Analysts attributed the flattening to expectations of fewer rate cuts following a January nonfarm payrolls report that showed an unexpected increase in new jobs.
Bond investors continued to factor in a more gradual pace of easing from the Federal Reserve in 2026, given a recent batch of data showing a steadier economy that will likely avoid recession this year and next.
Thursday's economic data supported that view. Initial claims for state unemployment benefits rose 4,000 to a seasonally adjusted 212,000 for the week ended February 21, data showed. Economists polled by Reuters had forecast 215,000 claims.
U.S. fed funds futures on Thursday priced in about 55 bps of easing this year, equivalent to about two rate cuts of 25 bps each, a scenario that has been in place since the start of the year. The first rate cut is not expected until July or September.
(Reporting by Gertrude Chavez-Dreyfuss; Editing by Andrei Khalip and Edmund Klamann)
((gertrude.chavez@thomsonreuters.com; 646-301-4124))
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