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Will Treasury yields fall to 1.5%?

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With Treasury yields confounding predictions they would rise this year, one bank is polishing up its previously tongue-in-cheek prediction the 10-year yield would fall to 1.5 percent.

"We're more than halfway there," DBS said in a note Wednesday, of its "Holiday Heresy" prediction at the end of last year that rather than the market's prediction the yield would rise to 3.50 percent, it would instead fall, citing its belief the global economic recovery wasn't as strong as the market expected.

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The 10-year U.S. Treasury yield rose from 1.60 percent in mid-May of 2013, when the Federal Reserve first broached its plan to taper its asset purchases, to around 3.0 percent at the start of 2014, around the time DBS made its prediction.

But despite expectations it would rise further, the yield has retraced, trading at around 2.128 percent in early Asia trade Thursday after falling as low as 1.865 percent Wednesday to touch around 17-month lows as it has trended down for around a month. Bond prices move inversely to yields.

"It mostly comes down to lousy growth. Or really lousy growth, perhaps, and it's not just about Europe," DBS said, citing U.S. gross domestic product growth of just 1.1 percent in the first half of this year, adding it believes the slow pace wasn't about the harsh weather in the first quarter.

Of course, Europe has also become an acute concern, it noted, especially within the "core-three" of Germany, France and Italy.

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"We're not talking about Portugal and Greece any more, it's the big guys that are shrinking," it said, citing the 4 percent drop in Germany's industrial production in August and a negative reading on the closely watched ZEW business sentiment survey. "The euro zone is on the cusp of its third recession in five years and the European Central Bank is on the cusp of outright QE (quantitative easing)," it said, adding Japan doesn't look much better, with more QE likely on the way there.

The Fed's QE may be ending this month, but markets are pushing back rate hike expectations, DBS said.

To be sure, while many may be scaling back expectations for the 10-year Treasury yield, it's not clear that a fall as low as 1.5 percent is on the cards.

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"I would find it difficult to believe the 10-year Treasury yield would retest 1.5 percent because there's no QE in the U.S.," said Mark Matthews, head of research for Asia at Julius Baer. "But as long as euro zone bond yields keep falling, U.S. yields will look relatively attractive," he said, attributing the low Treasury yield to Europe's woes. Germany's 10-year bond yield was around 0.84 percent Tuesday, which DBS said may be an all-time low.

"I don't think it has anything to do with the internal dynamics of the U.S.," Matthews said.

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Some are pointing to the release of FOMC minutes last week as the reason for the decline in Treasury yields, with the release indication the Fed is weighing "downside risks" to their growth and inflation outlook amid a stronger U.S. dollar and global economic weakness.

"Concerns over U.S. growth and inflation have begun to weigh on the minds of Treasury market investors and a number of FOMC participants," Morgan Stanley said in a note last week. "The post-minutes Treasury market repricing reflected an ill-positioned short base that was already jittery in the face of an incipient U.S. growth scare."

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But Morgan Stanley is also looking at the relative value Treasurys offer overseas investors, even as yields shrink, noting that Japan's private-sector investors have doubled their holdings of Treasurys over the past three years.

"Clearly, those investors must have seen increased value in Treasury yields relative to yields available domestically," it said. The 10-year Japanese Government Bond yield was around 0.49 percent in Asia trade Wednesday; it last traded north of 1 percent in mid-2012.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1