By Sunny Oh

Pyongyang says could test a hydrogen bomb in the Pacific Ocean

Treasury prices rebounded, dragging yields lower, on Friday trade after North Korea threatened to test a hydrogen bomb in the Pacific Ocean, escalating tensions between the U.S. and the isolated nation and modestly stoking demand for Treasurys and other assets seen as safe.

The benchmark 10-year Treasury yield slipped to 2.254% from 2.277% late Thursday. The 30-year bond yield fell to 2.786% from 2.808%, while the shorter 2-year note dipped to 1.427% from 1.442%, unwinding some of the selloff seen on Wednesday after the Federal Reserve committed to hiking rates one more time this year. (http://www.marketwatch.com/story/still-on-course-fed-signals-one-more-rate-hike-in-2017-2017-09-20)

North Korea's minister of foreign affair said the regime intended to test a hydrogen bomb in the Pacific Ocean. The country's leader Kim-Jong Un had warned of the "highest level of hard-line countermeasures in history," in response to President Donald Trump's announcement of new sanctions on North Korea.

Read:Kim Jong Un calls Trump 'mentally deranged U.S. dotard', setting off scramble for dictionaries (http://www.marketwatch.com/story/kim-jong-un-calls-trump-mentally-deranged-us-dotard-setting-off-scramble-for-dictionaries-2017-09-21)

Haven assets like the Japanese yen and gold strengthened along with U.S. government paper. The yen rose against the dollar by 0.4% to 112.03. While, gold prices rose 0.25% to $1298 per ounce, paring its decline after Wednesday's selloff.

"The flight-to-quality move overnight found its origin on the Korean Peninsula," wrote fixed-income strategists Ian Lyngen and Aaron Kohli BMO Capital Markets.

But assessing the market impact of geopolitical turmoil hasn't been straightforward. After the regime fired an intercontinental ballistic missile over Japan last Friday, investors looked past the show of force (http://www.marketwatch.com/story/short-dated-treasury-yields-rise-as-traders-await-data-deluge-fed-meeting-2017-09-15).

Looking ahead, traders will watch the U.S. Markit purchasing manufacturers index at 9:45 a.m. Eastern. Other than that, investors would keep their eye on the docket of speeches by members of the Fed's interest-rate setting body, days after the central bank appeared to pay no heed to the softening inflation data as it kept its 2018 forecast unchanged (http://www.marketwatch.com/story/feds-yellen-says-low-inflation-a-mystery-but-not-mysterious-enough-to-keep-rates-low-2017-09-20).

Kansas City Fed President Esther George, nonvoting member, and Dallas Fed President Robert Kaplan, voting member, will speak at the "Global Oil Supply & Demand: Prospects for Greater Balance" conference at 9:30 a.m. and then 1:30 p.m.

Earlier in the day, Reuters reported (https://www.reuters.com/article/us-fed-williams/feds-williams-sees-calm-market-reaction-to-balance-sheet-unwind-idUSKCN1BX1EE) San Francisco Fed President John Williams, nonvoting member, said he expected subdued market reaction to the central bank's balance sheet reduction, which will kick off in October.

In Europe, the yield for the German 10-year government bond, a proxy for the eurozone, was virtually unchanged at 0.458%.

(END) Dow Jones Newswires

September 22, 2017 09:11 ET (13:11 GMT)