Auction Appetite
The next significant test for the Treasury market is set to be Wednesday’s auctions. The government is planning to sell $18 billion of notes in a reopening of its two-year floating-rate security, and $41 billion of five-year debt. The sale of 2024 securities will be of particular interest given the recent outperformance of that part of the curve, generally referred to as the belly.

The speed of the decline in U.S. Treasury yields has also been fueled by a wave of mortgage-related hedging in the swaps market, said Credit Agricole’s Li. That’s because a fall in financing costs likely sparked more people to refinance their mortgages, cutting mortgage-bond holders duration.

Read more on how mortgage-related hedging sped the fall in yields

The yield on 10-year Treasuries was 2.36 percent at 10:47 a.m. in New York, down six basis points from its close Tuesday. Yields on 10-year bunds fell seven basis points to around minus 0.08 percent.

Marty Mitchell, an independent strategist, wrote in his daily newsletter to clients, said that increasing amounts of negatively yielding bonds outside America have been supportive of the U.S. market and there are also haven flows into Treasuries. Mitchell recommended clients continue to “buy the dips” in Treasury prices, and noted downside yield support comes in at 2.34 percent, 2.32 percent and 2.30 percent.

Market Hesitation
Binky Chadha, a strategist at Deutsche Bank AG, has indicated that the move in yields and rate-cut bets may have its limits, and could even reverse.

“Further declines in the 10-year require pricing in of more rate cuts, but since 2014, the market has been hesitant to price more than 1 rate move by the Fed in either direction,” Chadha wrote in a note. “In the absence of very negative data or worsening of any of the long list of well known risks, the market is unlikely to take a strong view on further rate cuts and this argues for a V-shaped move in the 10 year.”

A closely watched segment of the U.S. yield curve that’s often seen as a harbinger of recession when it flips, moved further into inversion. The 3-month rate last week dipped underneath the 10-year yield for the first time in more than a decade and on Wednesday it fell to as much as 11 basis points below. In the lead-up to the economic downturn that began in December 2007, this part of the curve initially went negative about 23 months before the recession started.

Quantitative Easing
Helping drive long-term yields lower and invert the curve is investors’ growing belief that central banks will quickly step in -- beyond just cutting rates -- and support the economy if things look dire, including buying more bonds.

“Market participants believe that if we were to go into a recession the reaction function could be that quantitative easing programs begin again, with central banks going into long-duration bonds,” said Thomas Wacker, head of credit in the chief investment office of UBS Global Wealth Management, which oversees about $2 trillion.