By Min Zeng 
 

Investors piled into government bond markets in the U.S., Germany and the U.K. on Tuesday as geopolitical worries boosted demand for haven assets.

The buying sent the yield on the 10-year German government bond to a record low. The yield on the U.S. 10-year Treasury note approached the lowest level of 2014.

In late afternoon trading, the benchmark 10-year Treasury note was 8/32 higher, yielding 2.462%, according to Tradeweb. Bond yields fall as their prices rise.

The yield on the 10-year German government bond fell to 1.12%. The yield on the 10-year U.K. government bond dropped to 2.547%.

Investors are keeping an eye on fallout from the latest sanctions against Russia from the West on Tuesday.

The European Union's sanctions for the first time target sectors of Russia's economy, including its state-controlled banks and its oil industry. The sanctions remain tightly focused because the EU wants to give Russian President Vladimir Putin a chance to stop his alleged support of rebel groups in eastern Ukraine.

"It is flight for safety," said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co. "The EU sanctions will not only hurt Russia, they will hurt the EU, particularly Germany, hard" given the close trading relationship between Russia and Germany.

U.S. government bonds offer superior yields compared with their German counterparts, drawing investors for relative value. This has been one of the main factors sending Treasury yields lower this year.

"The reality is that the Treasury market and the Bund market are the primary assets that investors use for safe-haven buying, so rallying Bunds make Treasurys look more attractive in comparison and bring buyers into the Treasury market," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

Treasury bonds got an additional boost Tuesday from strong demand at a sale of $35 billion in five-year notes.

The new five-year notes were sold at a yield of 1.72%. Overall demand rose to the highest since March. The direct bid, which includes buying from U.S. investment firms and depository institutions, climbed to 25.9%, the highest level since December 2012.

The 10-year Treasury yield fell to 2.40% on May 29, marking the low for 2014 and the lowest level since June 2013. The yield was at 3% at the start of the year.

The bond market briefly pared its price gains earlier Tuesday on an upbeat U.S. consumer-confidence report.

The Conference Board, a private research group, said its index of consumer confidence rose to 90.9 in July from a revised 86.4 in June. The July reading is the highest since October 2007, before the recession.

German government bond yields have fallen this year as the European Central Bank slashed official interest rates to a record low to support the euro zone's flagging economic recovery. Investors and economists expect the ECB to add more monetary stimulus this year to prevent slowing inflation from turning into deflation--a persistent decline in consumer prices that would discourage consumer and business spending.

The prospect of more easy policy from the central bank has sparked a broad price rally in euro-zone government bond markets this year, sending yields to very low levels.

In the U.S., the Federal Open Market Committee started its two-day policy meeting Tuesday. It is scheduled to release a statement Wednesday afternoon containing its latest assessments on the economy and inflation, as well as its interest-rate policy.

Economists widely expect the Fed to announce another $10 billion reduction in its monthly bond purchases, shrinking them to $25 billion a month.

The Fed has been cutting its monthly buying since January. Policy makers have said the program--which has played a big role in keeping bond yields near historic lows to stimulate the economy--will likely end before the end of October.

A particular focus for bond investors is when the Fed is going to start raising its official interest rates.

 
COUPON  ISSUE   PRICE      CHANGE   YIELD     CHANGE 
1/2%    2-year 99 29/32    flat     0.542%     flat 
7/8%    3-year 99 22/32    up 1/32  0.982%     -0.8BP 
1 5/8%  5-year 99 23/32    up 2/32  1.686%     -1.7BP 
2 1/8%  7-year 99 31/32    up 5/32  2.130%     -2.7BP 
2 1/2% 10-year 100 10/23   up 8/32  2.462%     -2.9BP 
3 3/8% 30-year 102 29/32   up 25/32 3.222%     -4.1BP 
2-10-Yr Yield Spread: +192.0BPS Vs +198.9BPS 
 
Source: Tradeweb 
 

Write to Min Zeng at min.zeng@wsj.com