In Germany, where average yields for the entire market dipped below zero for the first time ever last month, bunds soared to 0.78 percent before falling to 0.62 percent Friday.
The speed and magnitude of those losses still pale in comparison to previous market meltdowns, including the “taper tantrum” that then-Fed Chairman Ben S. Bernanke touched off in May 2013. And there’s little chance of a repeat now, even if yields jump further in the near-term, according to Priya Misra, Bank of America’s head of U.S. rates strategy.
Split Decision
Not only has a raft of U.S. economic releases -- from retail sales to consumer confidence and factory production -- been so disappointing, the data hasn’t nearly been strong enough to trigger the kind of inflation what would prompt bond investors to demand much higher yields.
“For the bull market to be over, we need robust global growth and inflation,” said Misra, who forecasts 10-year yields will end the year at 2.35 percent. “Fundamentals don’t argue for much higher yields.”
Misra points to the “term premium” metric, which measures the extra yield that 10-year debt offers over short-term rates. In mid-April, it was minus 0.35 percentage point, a mis-pricing that suggested yields were too low. It’s now closer to zero, enough to compensate buyers in a world where inflation is weaker than at any time in a quarter century.
Some analysts remain unconvinced. Last week, Goldman Sachs boosted its year-end yield forecasts for both Treasuries and German bunds, saying the “valuation gap is still sizable” and will only grow as the global recovery takes hold.
Shock Value
The firm now sees the 10-year U.S. note ending at 2.75 percent, from 2.5 percent before, and comparable bund yields at 0.9 percent, versus its prior estimate of 0.5 percent.
“There is no question that rates are going to be going higher,” based on our forecasts for U.S. growth and Fed rates, as well as a more stable Europe, said Eric Green, the head of U.S. economic research at TD Securities USA.