U.S. Treasury yields fell Wednesday as investor sentiment improved on the prospect of a diplomatic solution between the U.S. and Iran that could result in the reopening of the Strait of Hormuz.

Investors once again cautiously anticipated a breakthrough in the Middle East after remarks from U.S. President Trump. "I believe we'll make a deal right after the election, because it doesn't make sense for [the Iranians] not to," Trump said.

"Markets continue to err on the side of new momentum for diplomacy between the U.S. and Iran on breaking the energy-choking deadlock," KBC Bank analysts said in a note.

The 10-year U.S. Treasury yield fell 0.8 basis points to 4.958%, according to Tradeweb.

Hopes for a resolution have helped keep oil prices below $100 per barrel, with Brent last trading at $99.47. Oil prices have also been pushed lower by Saudi Arabia signaling that it is running tests on its East-West pipeline and could restart flows as early as this week. The pipeline, a crucial route circumventing Hormuz, was recently closed after drone attacks.

Declining oil prices could help to ease inflation concerns and relieve pressure on Treasury yields, said Konstantinos Chrysikos, sales and operations leader at Kudo.com.

Eurozone bond yields rose, however, reversing earlier falls, after provisional purchasing manager indexes revealed stronger-than-expected eurozone economic activity during September. The dollar also shrugged off declining energy prices, and the DXY index, which measures the dollar's value against a basket of currencies, rose to an eight-week high of 100.862 due to expectations of further U.S. interest-rate increases.

The yield on the 10-year German government bond last traded at 3.461%, up 1.2 basis points, while the 10-year French equivalent traded at 4.498%, up 1 basis point on the day, according to Tradeweb.

The preliminary eurozone composite purchasing managers' index, a measure of private-sector activity, rose to 53.1 in September, well above expectations of 51.5 in a Wall Street Journal poll and the 50 level that signals expansion in activity. Individual French and German purchasing managers' surveys were also stronger than expected.

The next major political catalyst will be the summit between Trump and his Chinese counterpart Xi Jinping later this week.

"Markets have already begun to price in some optimism around U.S.-China talks, particularly following reports of progress on tariffs and AI," said Patrick Munnelly, market strategist at Tickmill Group.