By Ellie Ismailidou, MarketWatch

Treasury prices gained Tuesday, driving yields to their lowest level in three weeks, as falling oil prices and growing concerns about stress in European banks fueled demand for U.S. government debt.

Oil prices on Tuesday dropped sharply after Iran and Saudi Arabia poured cold water (http://www.marketwatch.com/story/oil-prices-lower-after-iran-douses-hopes-for-production-deal-2016-09-27)on hopes for a production-cap deal at the oil producers' meeting this week. Tumbling oil prices weigh on inflation expectations, which in turn are a big component of long-term yields.

Meanwhile, global appetite for investments perceived as safe was in part fueled by worries over German bank Deutsche Bank AG (DBK.XE) which extended losses from Monday when a report said German Chancellor Angela Merkel has ruled out state aid for the bank. Frankfurt-listed shares of Deutsche Bank (DBK.XE) have dropped more than 50% in 2016.

Deutsche Bank shares saw a brief pop (http://www.marketwatch.com/story/deutsche-bank-shares-turn-positive-after-justice-department-comments-2016-09-27) into positive territory Tuesday after a U.S. Justice Department official indicated that banks that cooperate with authorities in settling claims related to dealings in mortgage-related securities would see smaller fines. But the rebound soon faded.

Treasury yields somewhat rebounded after a report showed Americans in September expressed the most optimism about the economy since the summer of 2007 (http://www.marketwatch.com/story/consumers-the-most-confident-since-2007-2016-09-27), reflecting a sunnier view about the U.S. labor market.

The yield on the benchmark 10-year Treasury note lost 2.9 basis points to 1.560%, its lowest level since Sept. 7. Treasury yields fall when prices rise and vice versa. One basis point is equal to one-hundredth of a percentage point.

The yield on the two-year Treasury note , which is most sensitive to rate changes, fell 1.3 basis points to 0.746%. And the yield on the 30-year Treasury bond , which is the most sensitive to long-term growth and inflation expectations, slid 4.4 basis points to 2.284%, also marking a nearly three-week low.

In Europe, the yield on Germany's 10-year bond known as the bund, lost 3.7 basis points to negative 0.146%, approaching an all-time low, according to Tradeweb.

The tumbling-yield trend on Tuesday reflected growing risk aversion and speculation that potential stress in European financial companies might pose a systemic risk to markets and even keep the Federal Reserve from hiking U.S. interest rates by end of year, said Aaron Kohli, interest-rate strategist at BMO Capital Markets, in an interview.

Read: How Deutsche Bank woes are stressing out the U.S. stock market (http://www.marketwatch.com/story/how-deutsche-bank-woes-are-stressing-out-the-us-stock-market-2016-09-26)

(http://www.marketwatch.com/story/how-deutsche-bank-woes-are-stressing-out-the-us-stock-market-2016-09-26)Meanwhile, steep drops in oil prices boosted the appeal of long-term government debt, according to Kohli, as they boosted so-called real yields, which are the nominal Treasury yields minus the inflation expectations.

At the same time, on the U.S. economic front, some analysts cautioned against cheering the rise in consumer confidence.

"The rise in the present-situation index appears to reflect an improvement in labor-market conditions. The net proportion of respondents saying that jobs were plentiful rather than hard to get improved to a nine-year high," said Paul Ashworth, chief U.S. economist at Capital Economics, in an email.

"But that doesn't necessarily mean that faster wage growth is coming soon. The net proportion expecting incomes to improve in the next six months actually fell to. [the lowest] reading on net incomes since late 2013," Ashworth added.

(END) Dow Jones Newswires

September 27, 2016 12:51 ET (16:51 GMT)