Bond yields plunge to 2014 lows: Why?

Pushed down by fears of a slowing economy, the yield on the bellwether 10-year Treasury note fell to 2.44% Wednesday, its lowest since June 2013.

Bond yields fall on economic weakness, and the bond market has been sensing weakness since Dec. 31, when the 10-year T-note yielded 3.03%. Driving yields lower:

• Economic weakness. Gross domestic product gained a tiny 0.1% in the first quarter, according to the first calculation from the Bureau of Economic Analysis, and revisions are likely to show a contraction. Home prices lost momentum in the first quarter, as well.

• World weakness. Sluggish economic activity around the world has pushed other counties' interest rates lower than U.S. rates. The German 10-year government bond, for example, yields 1.34%, the French 10-year bond yields 1.72%, and the Japanese 10-year government bond yields 0.57%.

• World unease. Investors flock to Treasuries when war looms, in part because the U.S. has the world's largest army. Unease in Ukraine, Vietnam and the Middle East have made Treasuries a compelling buy for foreign investors.

Nevertheless, the surge into bonds puzzles some managers. Investors often run to bonds when stock market volatility is high; by most measures, it's low. The so-called "fear gauge," the Chicago Board Options Exchange's VIX, is nearing the lowest it's been since February 2007, according to Moody's Analytics. And the Federal Reserve has been buying fewer bonds in its quantitative easing strategy.

Sometimes, markets simply keep moving in one direction as investors pour in. "The market went through some technical levels today, and cash is just going in," says Loomis Sayles portfolio manager Chris Harms. "It was just a strong rally out of the gates this morning."

Bond prices rise when yields fall, and vice-versa. Including reinvested interest, the 10-year T-note has gained 5.9% this year, and the 30-year Treasury bond has soared 13%, Harms says. In contrast, the Standard & Poor's 500 stock index has ga! ined about 4.3% with dividends reinvested this year, and the average stock fund has gained 1.8%, according to fund-tracker Lipper.

Mortgage investors will feel some benefit from lower 10-year T-note rates: The rate on 30-year fixed-rate mortgages tracks the 10-year T-note yield closely. Last week, the average 30-year mortgage rate was 4.14%, according to mortgage giant Freddie Mac, close to a seven-month low.

Despite the 10-year bond's fall in 2014, the T-note's yield is still nearly a percentage point above where it was a year ago, Harms says. The T-note yield hit 1.63% on May 2, 2013. Its all-time low: 1.40% in July 2012.