By Daniel Kruger
U.S. government bond prices rose Tuesday, pushing the yield on 10-year Treasury notes further below 3%, as investors sought safer investments during the stock-market selloff.
The yield on the benchmark 10-year Treasury note fell for a sixth consecutive trading session, settling at 2.921%, from 2.990% Monday. The yield has fallen to its lowest level in almost three months after reaching a seven-year high of 3.232% on Nov. 8.
Yields, which fall when bond prices rise, declined along with stock prices as investors -- including pensions, individuals and mutual funds -- turned to less risky assets amid unsettled markets, analysts said. The rally in bonds intensified as major stock indexes extended losses during the trading session.
The fall in stocks -- which sent the Dow Jones Industrial Average down nearly 800 points -- erased Monday's gains as skepticism grew about whether the trade truce between the U.S. and China will do more than temporarily stall the escalating rhetoric and tariffs from both sides.
Concerns also remain about the pace of economic growth heading into 2019, as some investors expect the expansion to decelerate after two consecutive quarters of above-trend growth earlier this year.
The gap between yields on the two- and 10-year Treasury note yields narrowed to 0.110 percentage point Tuesday, the smallest difference since 2007. Investors closely watch the distance between the shorter- and longer-term yields because short-term rates have exceeded long-term ones before every recession since 1975, a phenomenon known as an inverted yield curve.
The gap two- and five-year yields inverted Tuesday, following Monday's inversion of the spread between three- and five-year yields.
"This kind of violent price action forces you to re-evaluate your outlook for the economy," said Michael Lorizio, senior bond trader at Manulife Asset Management. Slower growth often makes bonds' fixed return more appealing.
Government debt has rallied in recent weeks as a string of Federal Reserve officials suggesting the central bank could slow its pace of interest-rate increases. That shift in tone coincides with mounting doubts that U.S. economic growth.
While inversions of longer-term maturities invoke recession fears, investors see a different concern behind the short-term inversions: a decline in confidence that Fed will need to continue raising interest rates to keep inflation in check. In September, Fed officials were forecasting one additional rate increase this year and three more in 2019.
"That's kind of the play on the Fed no longer raising rates beyond a certain point," Thomas Simons, a money market economist said Jefferies Financial Group, said of the shorter-term inversions.
Fed funds futures, which investors use to bet on the path of central bank policy, indicated Tuesday afternoon that the probability that the Fed will raise rates four or more times by the end of next year is 7%, down from 26% a month ago according to CME Group data. That compares with 70% odds that they increase rates two times or less, up from 41% during the same period.
Sam Goldfarb contributed to this article.
Write to Daniel Kruger at Daniel.Kruger@wsj.com