The bond market's rally picked up steam when Fed Chair Janet Yellen's testimony was taken to mean the central bank won't be hiking rates all that much.
The gains started Tuesday with the surprise release of Donald Trump Jr.'s emails on his meeting with a Russian lawyer that suggested the Russian government supported his father's campaign.
The testimony released for Yellen's appearance before a House committee Wednesday morning highlighted that the Federal Reserve believes it is not that far from the neutral rate. While some strategists said the comments were not particularly new, Fed Governor Lael Brainard discussed the issue Tuesday and the market took her commentary as highly dovish.
The neutral rate is the level where the Fed's benchmark rate does not either boost or hold back the economy.
"That's what the market thinks, but I think that's flawed thinking. Everything she's said before is boilerplate on the neutral rates," said George Goncalves, head of fixed income strategy at Nomura. "I feel like there's some extrapolation from Brainard's comment yesterday. People were thinking she's confirming what Brainard said. That's wrong, in my thinking. ... The Fed still thinks they're not at neutral and they'll be heading toward it. On top of that, they think it will rise further."
Economists at Goldman Sachs, however, did see the comment as slightly dovish since Yellen confirmed she expects the neutral rate to rise but stay below historic levels.
Bond prices jumped and yields moved lower when Yellen's testimony was released, as traders responded to the headline, as well as another from Yellen that suggested more uncertainty about the course of inflation than her previous remarks.
"There is, for example, uncertainty about when — and how much — inflation will respond to tightening resource utilization," she said in the testimony.
The Fed has been telling the market that the drop in inflation is transitory.
"It's a small step away from inflation is transitory. That's what the market is responding to," said John Briggs of NatWest Markets.
Later in response to a question, Yellen told the House committee that the Fed is monitoring inflation carefully. "Temporary factors appear to be at work. It's premature to reach the judgment that we're not on the path to 2 percent inflation over the next couple of years. As we indicate in our statement, it's something we're watching very closely, considering risks around the inflation outlook." she said.
She added that monetary policy is not on a preset course. "We're watching this very closely and stand ready to adjust our policy if it appears the inflation undershoot appears consistent."
The 10-year yield dipped below 2.30 percent briefly, and was at 2.32 percent as Yellen spoke to Congress. The yield had been at about 2.38 percent before revelations Tuesday that Trump Jr. was told in an email that he would be given disparaging information on Hillary Clinton, as part of the Russian government's support for President Donald Trump's campaign.
"I think the narrative of where we're going to continue to see the Fed tightening at all costs is being questioned at the moment," said Ian Lyngen, head of U.S. rates at BMO.
The move lower in yields is a sharp contrast to the recent move higher in global rates. The yield on the German bund also moved sharply lower. Global rates had been rising on the theory that central banks are heading to tighter policy, with the Fed taking the lead.
"Momentum measures shifted. We were oversold and reversed abruptly," said Lyngen, when the emails were released by Trump's son. That move Tuesday set up the Treasury market for more buying, which sends rates lower and bond prices higher.
"I think the 2.30 level [on the 10-year yield] is important. It's been a focal point in recent months. The 200-day moving average comes in at 2.26 percent and that's going to be a difficult level to break without something softer in terms of data or a stronger 10-year auction," Lyngen said. The Treasury is scheduled to auction $20 billion of 10-year notes at 1 p.m.
"We're going to see how the auctions are being taken down. I can't help but imagine the events of this morning are supportive of the 10-year and 30-year supply," he said.
Lyngen and other strategists said the market is also concerned about the latest developments in the investigation into the Trump campaign's ties to Russia.
"I think the political uncertainty associated with the Russia election probe is adding an underlying bullish tone to the Treasury market as well," said Lygen. "I think [10-year yield] is not going to get back to 2.65 if there's all this uncertainty. It's not so much if this leads to significant legal proceedings or not. It's more does it become a situation where Trump is considered to be so bogged down with the scandal issues that he becomes an ineffective president."
Correction: Donald Trump Jr. released emails on his meeting with a Russian lawyer on Tuesday. An earlier version misstated the day.