• The bond rally “is a combination of oversold market conditions and Treasuries being seen as a haven going into the weekend,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “With only a few cuts priced in now for 2024, the backup we have seen in two- and five-year yields offers good haven value in the short term.”

Treasuries rallied sharply Friday, pulling yields from near year-to-date highs, as anticipated escalation of Middle East warfare stoked demand for havens.

Yields on two- to 10-year notes tumbled as much as 10 basis points at one stage — amid gains for government bonds globally — following reports that Israel is bracing for a possible attack from Iran. Two-year yields, which briefly topped 5% Thursday for the first time since November, fell below 4.86%.

The rally comes on the heels of the Treasury market’s worst two days since February, a selloff driven by inflation readings that savaged expectations for Federal Reserve interest-rate cuts this year. Two-year yields, more sensitive than longer-maturity debt to changes in Fed policy, remain about 13 basis points higher on the week.

The bond rally “is a combination of oversold market conditions and Treasuries being seen as a haven going into the weekend,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “With only a few cuts priced in now for 2024, the backup we have seen in two- and five-year yields offers good haven value in the short term.”

Friday’s flight from risk assets — and a surge in crude oil futures toward multi-month highs — partially restored rate-cut expectations, with derivatives contracts pricing in close to 50 basis points of easing by year-end, up from this week’s lows around 40 basis points. Still, as recently as a month ago, the market was pricing in the 75 basis points of cuts that Fed policy makers considered likely at the time of their most recent meeting.

Boston Fed President Susan Collins, speaking on Bloomberg Television Friday, said she remains “very optimistic” that inflation will slow despite this week’s consumer price index readings, but sees cuts beginning later than previously thought.

US yields extended declines that were paced by euro-zone bond market, which rallied after a European Central Bank official said it shouldn’t be afraid to shift its “overly prudent” stance on interest rates away from the Fed’s.

The benchmark 10-year note’s yield dipped below the 4.5% threshold for the first time since the CPI data were released Wednesday. This week’s selloff lifted 10-year yields above the threshold for the first time since November, however an anticipated wave of buying failed to materialize, reopening the question of how much higher they might need to go to compensate investors for perceived risk.

The yield surge cost investors 1.1% over the past two days as measured by the performance of the Bloomberg Treasury index, deepening its year-to-date loss to 2.9%.