Long-dated yields inched toward positive territory on Wednesday after the government's auctions of U.S. 10-year notes met a lukewarm reception. The results came after China moved to devalue its currency for a second day in a row, following its surprise decision on Tuesday.
The Treasury Department auctioned $24 billion in 10-year notes at a high yield of 2.115 percent—the lowest yield since April. The bid-to-cover ratio, an indicator of demand, was 2.40 and well below the recent average of 2.67.
The tepid demand could be an indication that we could begin to establish the lower end of the 10-year rate range of about 2.1 percent on the downside and 2.5 percent on the upside, according to Peter Boockvar, chief market analyst at the Lindsey Group.
Indirect bidders, which include major central banks, were awarded 60.1 percent, well above the 55 percent average. Direct bidders, which includes domestic money managers, brought 5.8 percent, versus a recent average of 11 percent.
The yield on the benchmark 10-year Treasury note recovered a bit after the announcement to trade down 3 basis points to 2.11 percent.
Meanwhile, the yield on the 30-year bond was flat at 2.8 percent, after touching 2.72 percent earlier in the session—a level last seen in April.
"The benchmark 10 yr note auction was weak," Boockvar said in a note. "The yield was above the [yield] when issued and the bid to cover of 2.40 is well below the one-year average of 2.67."
Benchmark U.S. 10-year yields fell as low as 2.045 percent earlier—the lowest since early May and below a 200-day moving average—after the People's Bank of China set the yuan fixing at 6.3306 against the U.S. dollar on Wednesday, 1.6 percent weaker than the previous day's level.
The move signaled Beijing's new commitment to set the daily fixings according to the previous day's closing spot prices and market moves of other major currencies.
The yuan extended losses, to trade around 6.42 per dollar, its weakest level in four years, fueling expectations of more sustained weakness and a feared "currency war"—where countries artificially weaken their currencies to gain a competitive advantage.
Markets demonstrated clear risk-off sentiment after the announcement, with Treasury yields falling to multimonth lows as investors rushed to safety buying. German bunds and British government bonds prices also rallied, pushing yields to lows.
China's most recent move also prompted fresh talk of additional monetary easing elsewhere, and even speculation that the U.S. Federal Reserve will be slower to raise interest rates.
Short-term U.S. interest rates markets signaled that traders see no more than a 40 percent chance the U.S. central bank would raise rates at its Sept. 16-17 meeting. That compares to Friday, after a solid July jobs report, when traders had priced in just above a 50 percent probability.
Some key data releases were also expected on Wednesday, with the July Federal Budget statement at 2 p.m. Investors will also be looking to the major data release of the week, retail sales, out on Thursday.
—CNBC's Jenny Cosgrave and Reuters contributed to this report.