(Bloomberg) -- Treasuries edged higher on expectations US interest rates will keep falling and as fresh trade tension between the US and China spurred demand for safer assets.
The 10-year Treasury yield slipped two basis points to 4.01%. A decisive break below 4% would send the rate to its lowest since early April. Yields on two-year bonds slipped 1 basis point to 3.47%, nearing levels seen three years ago.
Treasuries have rallied since the flare-up in trade talks prompted renewed demand for US government debt as a haven. Yields are down more than 10 basis points since late last week and Federal Reserve Chair Jerome Powell on Tuesday suggested the US central bank is on track to deliver another interest-rate cut later this month amid signs of economic weakness.
Bond markets are broadly stronger worldwide. Longer Japanese debt is climbing after firm demand at a 20-year government bond auction, while French notes are stronger on optimism that the French government will survive the country's latest political turmoil.
Additional comments from Powell signaling that the central bank may soon stop shrinking its balance sheet also helped lift Treasuries.
According to Michael Brown, senior research strategist at Pepperstone, Treasury yields at current levels suggest investors expect the Fed funds rate to fall to 3% around the middle of next year, from around 4.25%.
As a result, yields are unlikely to fall much further for now, unless another Trump-induced shock triggers a flight to safety, Brown said.
"The most obvious near-term candidate for further gains would be another growth scare if Trump's 100% tariff threats start to look like more of a realistic possibility," he said.
Investors are looking to a manufacturing print later Wednesday, along with speeches from Fed policymakers including Stephen Miran, Christopher Waller and Jeffrey Schmid.
Key inflation data which had been scheduled for Wednesday will now be released on Oct. 24 due to delays stemming from the continued government shutdown.
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