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Spooked investors run to bonds, sending yields to levels not seen since November

Falling Treasury yields are a litmus test for pessimism, and there's plenty of that around.

Yields move counter to prices, and buying in the bond market has driven interest rates to a level not expected by many bond pros just several months ago. But the potential for bad news keeps piling up, and there are now expectations that the 10-year Treasury yield could touch 2 percent, or even the 1.87 percent it was at just before the election with another unexpected development.

"You've got North Korea. You've got data weakness. You've got a hawkish Fed. You pick your poison. There's so many things that could be hitting rates here at any minute," said Aaron Kohli, senior rate strategist at BMO Capital Markets.

After a rally Monday, stock prices sagged Tuesday in a global sell-off that included worries about Sunday's upcoming French election, and heightened tensions between the U.S. and North Korea. The mood was made even worse by a rare Goldman Sachs earnings miss. Add to that, a weak inflation report last Friday, which signaled to some the Fed may be moving on rate hikes too quickly, plus a looming debate in Congress about funding the government by April 28.

The 10-year yield fell to a low of 2.165 percent Tuesday, the lowest since Nov. 10. The yield was at 2.171 percent in late trading. The yield was at 2.40 percent on March 24, the day the White House and Congress failed to hold a vote on a health care bill to replace Obamacare.

There is also lingering disappointment with Congress and the Trump administration over what looks like a longer time line to tax reform and stimulus. That was confirmed Monday when Treasury Secretary Steve Mnuchin said an August deadline for tax reform that he previously suggested would be too aggressive.

"On top of all that you have a logjam in Congress that's not getting anything through," Kohli said. He said on the chart of the 10-year Treasury yield, there is a gap at about 2.13/2.15 percent. "It probably needs some new bit of negative information to get through that opening gap," said Kohli, adding the next level below that would be 1.87 percent.

"It's really self-feeding," said John Briggs, head of strategy at RBS. Treasury yields last week broke an important mile marker, when the 10-year fell through 2.30 percent. That was the bottom of a range it had been in since just after the election, with the top at about 2.60 percent, reached in December.

Bond market strategists are watching stocks warily, since a breakdown in equities would drive buyers into Treasurys.

"We're watching the political developments here, and in France," said Kohli. "The recent news on any front hasn't been positive for risk in any way."

Kohli said traders Tuesday were watching the election in Georgia's Sixth Congressional District to replace former GOP Rep. Tom Price, who went to Washington to become health and human services secretary. He said the special election, expected to be won by a Republican, is viewed as an early report card for Republicans in Congress ahead of next year's mid-term elections.

Briggs said those very mid-term elections are now the new deadline for the Trump policies markets have been waiting for, such as tax reform and fiscal stimulus.

"Hopefully we see a consolidation here. The other effect that's been prevalent in the market is some investors have been jumping in and betting against yields rallying further," said Kohli, adding that some investors are getting caught short and being forced to cover.

In the past few days since Friday's weak consumer price index inflation report, expectation for Fed rate hikes have dropped. The benchmark 10-year has been a warning flag for broader markets and consumers, but the Fed funds futures are showing that traders see just about a 40 percent chance of a rate hike now in June. That's down from about 60 percent.

The 10-year's move is important since it is a general barometer for investor confidence. It also is a rate that is used to set mortgages and other lending rates.

Markets Wednesday will be watching the Fed's beige book on the economy at 2 p.m. ET, plus a batch of earnings including Abbott Labs, Morgan Stanley, BlackRock, US Bancorp, TD Ameritrade and Textron, before the opening bell. American Express, EBay, Qualcomm, CSX, and Canadian Pacific Railway report after the close.

Watch: Trader says time to sell bonds