Bond Dangers Compounded By U.S. Pushing Out Debt Maturities

Labor Gains

If yields increase 1 percentage point in the next year, the 30-year bond would lose 15 percent of its value, data compiled by Bloomberg show. Forecasters surveyed by Bloomberg expect the yield to reach 3.35 percent by year-end.

Last week’s jobs report provided the strongest evidence yet the economy will finally produce the kind of growth that prompts investors to turn away from Treasuries.

The labor market surged in January, capping the biggest three-month employment gain in 17 years. Wages, which failed to grow enough last year to stir inflation expectations, jumped by the most since 2008. Yields on Treasuries across all maturities soared, those on the 30-year bond rising by the most on a weekly basis since 2009. The yield, which ended at 2.53 percent Friday, rose to 2.55 percent today in New York.

After the report, traders moved up their expectations for when the Fed will start increasing rates. They’re pricing a 26 percent chance the central bank will raise rates in June, from 14 percent at the end of January.

Bull Case

The bond market’s inflation outlook over the next five years has also jumped to 1.49 percent, from 1.07 percent a month ago, data compiled by Bloomberg show.

Even if rates do rise, there’s are plenty of reasons to own Treasuries, according to Jennifer Vail, U.S. Bank Wealth Management’s head of fixed-income research. Treasuries will remain the haven of choice as Europe faces a bout of deflation, Japan is mired in another recession and growth weakens in China.

Negative yields in Germany and Switzerland, as well as the dollar’s strength, mean the U.S. is still an attractive destination for overseas investors. Thirty-year Treasuries yielded 1.57 percentage points more than comparable German debt at the end of last week, the most since at least 1994.

The Fed’s bond buying has also cut into supply. It holds more than half of the $1.04 trillion of 30-year bonds issued since the Treasury started selling them again in 2006.

Paradigm Shift

“The drivers are all putting downward pressure on yields, so we do like Treasuries,” Vail said from Minneapolis. “Most of that pressure is from the global hunt for safety and yield.”

Recent history hasn’t been kind to anyone calling for a tumble in bonds. Last year, Wall Street prognosticators said benchmark Treasury yields would rise and end at 3.44 percent last year. Instead, they fell to 2.17 percent.

So far this year, it’s been more of the same as selloff that forecasters predicted has yet to materialize.

While Treasuries may remain in demand for the time being, Eaton Vance Management’s Stewart Taylor is bracing for a sudden shift in sentiment that causes yields to jump.

“Perception changes on a dime,” Taylor, a money manager who helps oversee $296 billion globally, said from Boston. “I’m sitting on pins and needles every day.”