Yields keep falling. How low can they go?

September 14, 2011: 12:09 PM ET
Treasury yields have been on the decline for the past three decades, and the 10-year yield recently  broke below 2% for the first time ever. Click chart for more.

Treasury yields have been on the decline for the past three decades, and the 10-year yield recently broke below 2% for the first time ever. Click chart for more.

NEW YORK (CNNMoney) -- The 10-year yield broke through its long-term floor of 2% for the first time in history last month, and experts say you might want to get used to that.

Investors have been seeking safety in U.S. Treasuries in droves amid mounting concerns about Europe's worsening debt crisis and the United States' stalling economic recovery.

That flight to quality knocked the 10-year Treasury below 2% on Aug. 18, and since then, the yield has been hitting new record lows on an almost daily basis.

On Monday, the 10-year yield hit a fresh all-time low of 1.87%, although it managed to nudge back up against 2% on Tuesday.

"Europe is a scary place right now, and until we see a solid plan that will change investor perception, we have to get used to the 10-year yield hanging below 2%," said Kenneth Naehu, managing director and head of fixed income at Bel Air Investment Advisors.

It's not just U.S. Treasuries attracting nervous investors.

Investors still consider German debt to to be a safe asset. And on Monday, the yield on the 10-year German bund hit a fresh record low of 1.72%, before bouncing back to 1.79% Tuesday.

As investors bail out of riskier markets, bond yields in Europe's debt-ridden countries have been spiking. The 10-year yield on Greek bonds spiked to 22.8% Tuesday, while Italy's benchmark note rose to 5.7%.

Europe's debt crisis: 5 things you need to know

"Investors are telling political entities and central banks of the world that there is a big problem, and that they don't have confidence in the system or the current cures," said Ray Humphrey, portfolio manager of the Hartford U.S. Government Securities HLS Fund (HAUSX). "If the European Central Bank and European governments don't get out in front of this situation relatively soon, the crisis will be global, and the desire for U.S. Treasuries could easily drive the 10-year to 1%."

And in that "worst case scenario," Humphrey said the euro would crumble and the safe haven appeal of German bonds would also diminish.

Even if the Europe manages to avoid the worst, experts say to get used to record low interest rates for an extended period of time.

"There are a series of very, very big question marks in regard to Europe's mess, and there only seem to be negative answers," said David Ader, government-bond strategist at CRT Capital. "At the very least, I think we're going to see the 10-year yield swinging between about 1.75% and 2.75% for the next two to three years.

Economists at Capital Economics have lowered their year-end forecast for the 10-year yield to 1.5%, from 2% earlier, and expect it to hold near that level through 2013, as the Federal Reserve will likely takes steps drive long-term interest rates lower to spur the economy.

But the trend of falling Treasury yields won't last forever, despite the moves over the last three decades, said Bel Air Investment Advisors' Naehu.

"Eventually, the government and Fed will set out on a quest to increase inflation, and once they're successful, we'll see rates move substantially higher," he said.

That's been Pimco (PTTRX) chief investment officer Bill Gross' argument since the start of the year, and Naehu said that eventually, his bet will be right. Knowing when to make it, however, is the hard part.  To top of page

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