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U.S. Treasury yields fell to their lowest levels since September, 2017, on Monday as investors piled more cash into low-risk debt to seek protection from market volatility owing to growing trade conflicts between the United States and its trade partners.

Bond yields tumbled also on expectations of an imminent rate cut from the U.S. Federal Reserve in a bid to stabilize markets and the economy with manufacturing growth cooling to its weakest pace in 2½ years in May.

“It’s just that things seem to be getting bad enough every day that the Fed is going to cut,” said Gennadiy Goldberg, U.S. senior interest rates strategist at TD Securities.

The near US$16-trillion sector produced a total return of 2.35 per cent in May, its strongest monthly showing since August, 2011, according to an index compiled by Bloomberg and Barclays.

Long-dated Treasuries generated a stellar 6.7-per-cent return, their juiciest performance since January, 2015, as the safe-haven market rally knocked 10-year yields some 36 basis points lower last month (100 basis points equal one percentage point). In just a month, they leapfrogged junk bonds as the best performing U.S. bond sector so far this year.

U.S. Treasuries were among the top assets in the world in May. They handily beat stocks, but trailed the yen somewhat.

At 3 p.m. EDT, benchmark 10-year Treasury yields fell 6.10 basis points to 2.081 per cent after hitting 2.071 per cent, their lowest level since September, 2017. Ten-year yields were set for their biggest two-day fall in slightly more than a year.

Two-year yields declined 10.20 basis points to 1.842 per cent. They touched 1.838 per cent earlier Monday, which was their lowest since December, 2017.

Two-year yields were on track for their biggest two-day fall since October, 2008, when they declined by nearly 35 basis points.

Shorter-dated yields have tumbled on a growing conviction that the Fed would lower key rates more than once before year-end to stave off a recession.

RATE-CUT BETS GROWING

St. Louis Fed president James Bullard said on Monday a rate cut may be “warranted soon” because of global trade risks and weak domestic inflation.

In what is widely accepted as a recession signal, 10-year yields have been firmly below three-month note yields. The inversion in the yield curve has become more pronounced and steepened at one point on Monday at 27 basis points, the deepest since 2007.

Interest rate futures traders are now pricing in a 60-per-cent chance of a rate cut at the Fed’s July 30 to 31 meeting, up from 18 per cent a week ago, according to the CME Group’s FedWatch program.

They implied a 82-per-cent chance of another rate cut at the Fed’s December meeting, up from 30 per cent a week ago.

Still, it may be too early for the Fed to cut rates this summer.

“The bond market is a bit overexcited,” TD’s Ms. Goldberg said. “We have not yet seen trade [risk] has spilled over enough into the real economy.”

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