By Ellie Ismailidou, MarketWatch

In the U.S., rate hike expectations continue to fall, adding to yield decline

Treasury prices soared Tuesday, driving yields to their lowest level in two weeks, as a global equity selloff sparked by concerns about economic slowdown overseas fueled demand for so-called haven assets, such as U.S. Treasurys.

The Treasury rally started overnight, following weak Chinese manufacturing data and an interest-rate cut in Australia, and continued in New York trading hours, as fear crept into the U.S. equity market (http://www.marketwatch.com/story/stock-futures-slide-as-fear-creeps-into-the-markets-2016-05-03).

(http://www.marketwatch.com/story/stock-futures-slide-as-fear-creeps-into-the-markets-2016-05-03)Soaring demand for government debt pushed prices higher and yields, which move in the opposite direction, down to a two-week low.

The yield on the benchmark 10-year U.S. Treasury note fell 6.2 basis points to 1.803%, its lowest level since April 19, according to Tradeweb.

The yield on the 2-year Treasury note lost 4 basis points to 0.754%, while the yield on the 30-year bond tumbled 5.2 basis points to 2.666%, after posting Monday its largest yield gain since April, 20, according to Dow Jones data.

Demand for government debt also soared in Europe, pushing yields lower across the board. The yield on the 10-year German bond, known as the bund, lost 6.2 basis points to 0.218%, its lowest level since April 20.

In China, a private gauge of nationwide factory activity indicated a faster pace of contraction (http://www.marketwatch.com/story/chinas-caixin-manufacturing-pmi-slips-again-2016-05-02) and missed analyst forecasts.

In Australia, the Reserve Bank cut interest rates (http://www.marketwatch.com/story/reserve-bank-of-australia-cuts-cash-rate-to-175-2016-05-03-0485414) for the first time in a year, pushing its benchmark interest rate to a record low of 1.75%, in a bid to combat record-low inflation and a strong local currency.

The Australian dollar (http://www.marketwatch.com/story/reserve-bank-of-australia-cuts-cash-rate-to-175-2016-05-03-0485414) slumped, while a widely watched gauge of the greenback's strength (http://www.marketwatch.com/story/euro-leaps-above-116-for-first-time-since-august-dollar-dives-against-yen-2016-05-03) fell to its weakest level since January 2015.

In the Treasury market, "the momentum thrust remains bullish," said David Ader, head of government bond strategy at CRT Capital Group, in emailed comments, citing Tuesday's slump in equities as a main driver of demand for Treasurys.

"But aside from the bullish charts, which are really the dominant element to our view, we do believe that the steady litany of soft-ish data will take hold," Ader added.

Adding to the tumbling yield trend was the view that the Federal Reserve would have to hold off on raising interest rates in the U.S., given the backdrop of weak data overseas, said Aaron Kohli, interest-rate strategist at BMO Capital Markets, in a note.

"We continue to think that it is still too early to bet on rate hikes in July given the weak global backdrop," Kohli said, adding that he expects short-term yields to remain subdued.

On Tuesday, a closely watched measure of the market's Fed expectations, the CME Group's FedWatch Tool (http://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html), indicated a 13% probability of a rate increase in June, down from 23% a week ago, and a 28% probability of a rate hike in July.

(END) Dow Jones Newswires

May 03, 2016 10:03 ET (14:03 GMT)