As the market prices in the Fed’s unwind, it may trigger a rise in the 10-year term premium, a measure of the extra compensation investors demand to hold longer-term instruments over short-dated obligations, according to Bank of America Merrill Lynch strategists. A pickup in Treasury issuance and a rising term premium -- combined with rising long-dated mortgage costs -- are set to trigger a steepening of the five- to 10-year yield curve and increase volatility, analysts said.

Bullish Data

While equity markets have cheered strong survey-based measures of consumer and business confidence, bond markets have focused squarely on the negatives: job growth lost steam in March and U.S. consumer spending rose less than forecast in February. Still, broad-based measures of consumption are strong and the slack in the labor market is much-diminished, suggesting it’s unlikely U.S. growth will cool this quarter, according to analysts. That’s given JPMorgan confidence to stick to its forecast that the U.S. economy will grow 3 percent this quarter.

Yield Advantage

Foreign selling of U.S. Treasuries may take center stage in the coming months because returns from U.S. obligations in Europe and Japan have fallen when including currency-hedging costs, while the yields on offer on government debt closer to home have risen.

Financial Conditions

Analysts from Goldman Sachs Group Inc. to Morgan Stanley foresee the U.S. central bank striking a more hawkish stance in the coming months to engineer a tightening in financial conditions. This would be in reaction to the risk of above-trend growth at a time when employment and inflation are close to the Fed’s target.

“The robustness of the recovery, and emerging discomfort with some of the asset price developments they have generated, has led the Fed to shift their focus to the longer end,” wrote Erik Nielsen, chief economist at UniCredit SpA in London. “I don’t know why fixed-income markets haven’t reacted so far, but they will; central banks have all the tools available to steepen the curves when that’s what they want.”

The counterpoint to the bearish projections comes from Deutsche Bank AG strategists. They see a lack of fiscal action and signs of soft economic data conspiring to postpone the bear market in bonds, projecting fair value for the 10-year benchmark at 2.25 percent.

“The bear market we expected to continue through 2017 seems to be on hold mainly due to the lack of progress on structural tax reform and we do not expect that to change anytime soon,” strategists led by Dominic Konstam write.