Top and bottom line: war is good for bonds/rates. The risk of war had increased after last week's US attack on the Iranian general and flared further overnight after the Iranian attack on air bases in Baghdad. By not inflicting any US casualties, the attacks allowed Iran to have their retaliation (something that had been a point of uncertainty) without starting a war. Trump confirmed as much today.
Thus, paradoxically, the seemingly significant missile attacks last night actually paved the way for the most significant de-escalation so far. Markets are trading it accordingly with Treasuries much weaker on the day, stocks much stronger, and MBS lagging the Treasury move.
Economic data was glossed over and the afternoon's 10yr Treasury auction didn't have much of an impact despite being noticeably weaker than expected.
The risk for bonds in the bigger picture is that this marks a turning point in the general momentum that lead yields lower into the new year. In other words, perhaps the natural inclination would have been for 10yr yields to move up and over 1.95% without last week's US/Iran flare-up. With yields already back to 1.87%, it makes sense to defend against that possibility.