Heightened worries surrounding U.S. regional banks have fueled increasing market bets on interest rate cuts by the Federal Reserve, leading to a continued rise in U.S. Treasury yields, with short-term yields dropping to their lowest levels in over three years.

The yield on the two-year U.S. Treasury note fell by as much as 5 basis points to 3.37%, marking the lowest level since August 2022; the five-year yield also dropped to 3.50%, hitting a new one-year low; meanwhile, the benchmark ten-year Treasury yield slipped below the 4% mark.

This influx of funds into U.S. Treasuries is part of a broader trend of flight-to-safety buying across global markets. Growing market apprehension stems from issues disclosed by two U.S. regional banks regarding problem loans, suggesting that a crisis may be gradually expanding.

"The rise in U.S. Treasuries today essentially reflects a 'search for safe assets'," said Anna Wu, cross-asset strategist at Van Eck Associates. "In the context of rising uncertainty triggered by credit concerns, the current market movement can be described as a stress response."

Similar trends are observed in European and UK government bonds. The yield on Germany's ten-year bonds decreased by as much as 4 basis points to 2.53%, the lowest since June. Meanwhile, the yields on UK two-year and ten-year bonds fell by up to 5 basis points to 3.80% and 4.45%, respectively.

"The classic 'flight-to-safety' scenario has returned to the market," said Christoph Rieger, Head of Rates and Credit Research at Commerzbank AG, adding that German bund yields may drop below 2.5%. "Currently, there are no apparent obstacles to the rising trend of government bonds."

Anxiety among U.S. regional banks adds another layer of concern for investors. In addition, the threat of a government shutdown and the ongoing trade tensions are putting pressure on the global economic growth outlook.

Traders' bets on Federal Reserve rate cuts have intensified, with current market pricing indicating that the Fed could cumulatively cut rates five times (by 25 basis points each) by the end of next year, with about a 30% chance of a sixth cut.

Statements from Fed officials have further reinforced market expectations for more accommodative policies. Fed Governor Christopher Waller stated on Thursday that rates could continue to be lowered by 25 basis points increments, while fellow governor Stephen Miran advocated for a more substantial reduction.

"In the absence of official economic data, investors are focusing on negative news flow and boosting their bets on Fed rate cuts," wrote Eugene Leow, Senior Rate Strategist at DBS Bank Ltd., in a report. "We maintain the view that U.S. Treasury yields will trend downward in the short term, and if market sentiment worsens further, this trend may become more pronounced."