A wave of typical safe-haven buying has enlivened the dormant U.S. Treasury market, pushing benchmark yields to their lowest levels in months.

As concerns arose regarding credit risks at regional banks last week amid a government shutdown that delayed key data related to employment and inflation, the already tranquil U.S. Treasury market was disturbed. Concurrently, an index tracking bank stocks recorded its largest drop since market turmoil spurred by tariffs in April.

In a rush to seek safety, investors flocked to the U.S. Treasury market, driving the yield on the policy-sensitive two-year note below 3.4%, its lowest level since 2022, while the yield on the 10-year note fell below 4%. This marked the second round of safe-haven buying for U.S. Treasuries in October, following increased trade tensions the previous week that triggered a more significant rebound.

Signs of a deteriorating job market have seemingly made a 25-basis-point rate cut by the Federal Reserve on October 29 almost a certainty. Investors are now locking in the 4% yield on 10-year Treasuries as a safe harbor amid high valuations in the stock and credit markets.

“The U.S. Treasury has served as a good safe haven over the past week,” said Priya Misra, a portfolio manager at JPMorgan. “Any additional credit concerns or trade tensions could lead to further declines in interest rates.” This asset manager holds bonds ranging from five to 10 years, finding comfort in the credit assets they favor.

Even the 30-year Treasury has risen, alleviating fears related to global devaluation trades that pushed gold prices to historic highs of over $4,000 per ounce, fueled by massive borrowing demands from major economies.

Expectations for the Federal Reserve's future movements greatly influence the trajectory of U.S. Treasuries. In a recent address, Chairman Jerome Powell remarked on the slowing hiring pace, which he anticipates may weaken further.

The Federal Reserve reinstated its easing cycle in September, lowering the rate by 25 basis points to a range of 4%-4.25%. A market indicator reflecting the so-called terminal rate of this cycle has dropped below the recent low of 3% this month and is approaching the cycle low seen in September 2024.

Following October 29, expectations are already priced in for another 25-basis-point cut in December, with projections for two additional cuts by mid-2026.

This month’s market activity underscores the traditional role that U.S. Treasuries play as a stabilizing force in investment portfolios during crises. This contrasts sharply with the situation in April, when market turmoil triggered by Donald Trump's tariff measures raised concerns that global investors would sell off Treasuries. At that time, Treasury prices fell along with stocks and the dollar.

The sudden rebound in the bond market evokes memories of the situation in March 2023, when the collapse of Silicon Valley Bank caused a drop of over one percentage point in two-year yields.

Since April, instances of the 10-year Treasury yield falling below 4% have been rare. Last Friday, the yield dropped to 3.93%, the lowest level since April 7, and subsequently rebounded to 4% with a softening of Trump’s stance towards China and relief in credit concerns stemming from regional bank earnings.

There is still potential for the 10-year yield to drop below 4%, “but the situation would need to worsen further,” noted Gregory Faranello, head of U.S. interest rate trading and strategy at AmeriVet Securities.

Traders are utilizing options to hedge against a significant dip below the 4% mark for the 10-year yield. A further drop might provoke additional hedging, potentially solidifying the best performance for Treasuries since 2020. As of last Thursday, the Bloomberg U.S. Treasury Index had risen 6.6% year-to-date.

Morgan Stanley rate strategist Matthew Hornbach and others expect room for decline in the 10-year yield. In a report this month, they stated that investors should “say goodbye to 10-year Treasury yields above 4%,” emphasizing that the longer the government shutdown continues, the more likely concerns will escalate.