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While there seems to be no end on the horizon to this year's dramatic rally in US Treasuries that has collapsed yields more than a full percentage point, conditions are ripening for a reversal that could disrupt the market. Some signals analysts track point to higher yields, although no one knows when the shift is coming. The consensus view is that US yields could go even lower. A protracted US-China trade war, a darkening global economic outlook, and the Federal Reserve's monetary easing stance are bullish for Treasury prices.
Still, yields this low are getting harder to justify, some analysts said. Some investors have hedged against a possible US rate rise by reducing holdings of long-term bonds and grabbing other fixed-income products such as private debt and structured credit. "This feels to me like dot-com level cockiness on this side of the bond bulls," said Kevin Muir, market strategist at East West Investment Management in Toronto.
"I would just caution as somebody who has been through a lot of market shifts, that as we get more and more euphoric and more volatile, the chances of a big move, snapping back and hurting people in a big way will increase dramatically," he added. US 10-year and 30-year yields have both dropped more than 100 basis points since January, on track for their steepest fall in eight and five years. Ten-year yields are currently at 1.521%, while 30-year yields are at 1.988% after hitting a record low on Wednesday of 1.905%.
Evercore ISI technical analyst Rich Ross said the 10-year yield is the most oversold since 1998. The one-month Merrill Lynch MOVE index, which tracks the one-month implied volatility for the 10-year Treasury yield, hit a more than three-year peak of 91.822 last week, suggesting expectations of major price moves. Investors had wondered about the prospect of US bond yields below zero as negative yields have become a mainstay in Europe and Japan. The United States is expected to avoid this fate, but some have not ruled it out.
Longer dated US Treasuries have led the rally, prompting a yield curve inversion, where shorter-dated borrowing costs are higher than longer ones. An inversion is widely viewed as a signal of a looming recession. The premium on 2-year yields above 10-year yields narrowed a bit on Thursday to -1.40 basis points.

Copyright Reuters, 2019

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