By Daniel Kruger 

The yield on the benchmark 10-year Treasury note fell to its lowest level since 2017, dragged down by growing investor concerns that trade tensions between the U.S. and China could last longer and strain growth more than previously thought.

The 10-year yield recently traded at 2.299%, according to Tradeweb, down from 2.393% Wednesday. That is its lowest intraday level since October 2017.

Yields, which fall as bond prices rise, slid early in the session after surveys of purchasing managers in Europe suggested weak demand for exports, a sign it could be difficult for the region to climb out of its rut. Yields then extended their declines after a pair of reports on housing and business activity in the manufacturing and services sector suggested the U.S. economy could be losing steam.

The moves sent the yield on the 10-year note below the yield on the three-month Treasury bill for the first time since May 15, raising concerns among some investors about the durability of the economic expansion.

Investors watch the dispersion between yields on short- and longer-term Treasurys, called the yield curve, because it is seen as an important barometer of economic conditions. Shorter-term yields tend to exceed longer-term ones prior to recessions, a phenomenon known as an inverted yield curve.

Government-bond yields have retreated from multiyear highs hit late last year as trade frictions between the U.S. and China have dented hopes for a pickup in growth and inflation and the Federal Reserve has signaled a cautious approach to raising interest rates.

"Everybody is reassessing," said Jim Vogel, head of interest-rate strategy at FTN Financial. It will take time for investors to re-evaluate what has changed about their view of the economy and how that underpins markets, and in the beginning of that process "you have people reflexively flinch and move away from risk," he said.

Bank of America Merrill Lynch Wednesday lowered its year-end forecasts for sovereign-bond yields in countries including the U.S., Germany and Australia, citing a loss in confidence that the U.S. and China can resolve their disputes in the near future.

Several analysts said yields could move lower still. Some investors sold bonds in recent months expecting a rapid end to the trade conflict -- a wager that now looks overly optimistic, said Krishna Memani, chief investment officer at OppenheimerFunds.

"All of us were foolish to think this would get resolved quickly," Mr. Memani said. "We will be in this situation for quite some time."

Falling expectations for inflation also have spurred the rally. Muted inflation is good for the value of government bonds because it preserves the purchasing power of the debts' fixed payments.

Investors' estimate of the average annual rate of inflation over the next 10 years, measured by the difference between yields on fixed-rate government debt and Treasury inflation-protected securities, has fallen to about 1.7 percentage points from almost 2 percentage points one month ago. Investors are said to "break-even" buying TIPS rather than fixed-coupon debt if inflation equals or exceeds the yield difference between the securities.

The rise in tensions around the world isn't confined to China, said Gemma Wright-Casparius, a senior fixed-income portfolio manager at Vanguard Group. Investors also are assessing the impact of increasingly hostile rhetoric between the U.S. and Iran, continuing uncertainty about the U.K.'s plan to withdraw from the European Union and signs of continued softening in the European economy, she said.

"The whole kettle of geopolitical risk that had been put on the back burner in the first quarter has come to the forefront," Ms. Casparius said.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

(END) Dow Jones Newswires

May 23, 2019 14:57 ET (18:57 GMT)