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Treasury yields drop as economic fears resurface amid political concerns

U.S. government debt yields fell on Tuesday as the U.S. government shutdown and trade fears between Washington and Beijing stoked fears of slower economic growth.

The yield on the benchmark 10-year Treasury note fell about 4 basis points to 2.755 percent at 10:57 a.m. ET, while the yield on the 30-year Treasury bond dropped to 3.074 percent. Bond yields move inversely to prices.

Appetite for government debt rose over the long Martin Luther King Jr. holiday weekend after David MacNaughton, Canada's ambassador to the U.S., said that the U.S. has told Canada that it will request Huawei executive Meng Wanzhou be extradited. Meng, the daughter of Huawei Technologies founder Ren Zhengfei, was arrested in Canada at the request of the United States over alleged violations of U.S. sanctions on Iran.

Following the arrest, relations between China and the United States turned icy, a potential headwind to a permanent trade agreement between the two economic powerhouses. Huawei is the world's largest manufacturer of telecommunications equipment.

"Between Brexit, the U.S. government shutdown and the China news, the culmination of the three means trading will be sensitive to political developments," said Jon Hill, interest rate strategist at BMO Capital Markets. "The political back-and-forth seems well-entrenched."

International markets are showing a muted to downbeat picture on Tuesday, as global growth concerns weigh, with markets in Asia and Europe, along with U.S. futures, all seeing red.

On Monday, the International Monetary Fund (IMF) announced that it had revised down its estimates for global growth, with it projecting a 3.5 percent growth rate across the globe this year, and 3.6 percent for 2020. In October, the institution slashed its forecasts, due to increased trade tariffs between the States and China; and on Monday, it added that the global economic expansion was showing signs of losing momentum.

In the report, the IMF stated that risks to global growth continue to tilt to the downside, with topics such as Brexit, and escalating trade tensions adding to the pressure.

U.S. Markets Overview: Treasurys chart

Lawmakers in the U.S. continue to grapple with the longest government shutdown ever. The 32-day closure has resulted in staffing shortages at airport security and hundreds of thousands of federal employees remain without work. Historically, government shutdowns alone do not undermine U.S. GDP in a meaningful way, but they can affect how optimistic consumers and businesses feel and dampen long-term spending.

"The shutdown costs 10 to 15 basis points per week in terms of GDP," Nathan Sheets, chief economist at PGIM Fixed Income, said on Friday. "There could be a bit of a penalty to consumer and business confidence, maybe people will be a little more constrained than they were before."

"I think the 800,000 unpaid workers – they eventually all will get paid," Sheets added. "And a good chunk of the government expenditure that didn't happen will eventually happen. Still, people aren't going to eat twice as many meals after they get paid, something is lost."

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A Tuesday report from the National Association of Realtors found U.S. homes sales tumbled to their lowest level in three years in December and house price increases decelerated. The association said existing home sales declined 6.4 percent to an adjusted annual rate of 4.99 million units last month, the lowest level since November 2015.

Economists polled by Reuters had forecast existing home sales falling 1.0 percent to a rate of 5.25 million units in December.

"The existing homes sales data looked really weak, and is concerning because it's across a variety of types and regions," BMO's Hill added. "One of the outstanding questions in the market is that housing looks weak, but the fall in mortgage rates could restart the market."

"That being said, given declines in consumer sentiment and volatility in the equity market, these will all will be headwinds," he added.

—CNBC's Silvia Amaro contributed to this report