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Treasury Yields Extend Drop as Risk Aversion Cements Fed View

(Bloomberg) -- Treasuries extended gains, driving medium-term yields to a one-year low, as concerns surrounding US regional banks and lingering trade tensions spurred a flight to safety.

The five-year yield declined as much as four basis points to 3.51%, the lowest since early October 2024. The move came after two-year US yields sank to levels last seen in 2022 and the benchmark 10-year yield fell below the 4% mark.

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“The rally we’re seeing in Treasuries today is a hunt for havens story,” said Anna Wu, cross-asset strategist at Van Eck Associates. “There’s arguably some knee-jerk reaction amid spikes of uncertainty from the credit woes.”

The flight to Treasuries is part of a broader wave of haven buying that has swept over other global markets as concerns grow that problem loans disclosed by two US regional banks may point to a broadening crisis. Yields on 10-year Australian government bonds slid to 4.09%, the lowest since early April, while similar-maturity Japanese yields also declined.

Simmering tensions between Washington and Beijing also eroded risk appetite, with a gauge of Chinese shares traded in Hong Kong leading a selloff in Asian equities.

Bonds have also been supported by recent rhetoric from Federal Reserve officials which reinforced bets for more policy easing. Fed Governor Christopher Waller said Thursday that rates can continue to decline in quarter-point increments, while his counterpart Stephen Miran advocated a larger reduction.

Overnight-indexed swaps have fully priced in two quarter-point rate cuts by year-end and signal some chance of an even bigger reduction.

“In the absence of official data, investors focused on negative news flow and increased bets on Fed easing,” Eugene Leow, senior rates strategist at DBS Bank Ltd., wrote in a note. “We maintain that US yields will have a downward bias in the near term, a trend that could turn more acute if sentiment worsens.”

--With assistance from Neha D'silva.