NEW YORK - While there seems to be no end on the horizon to this year’s dramatic rally in U.S. Treasuries that has collapsed yields more than a full percentage point, conditions are ripening for a reversal that could disrupt the market.
“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. The one-month Merrill Lynch MOVE index .MERMOVE1M, 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.
The premium on 2-year yields above 10-year yields narrowed a bit on Thursday to -1.40 basis points.US2US10=TWEB Duration, expressed in years, measures how much a bond’s price will move when the Federal Reserve changes interest rates. The longer the duration, the higher the bond’s sensitivity to interest rate changes.
A J.P. Morgan survey showed last week that bond investors have already scaled back bullish bets on U.S. longer-dated government debt.Aside from technical factors, a fiscal response to economic recession fears, such as more spending and tax cuts from the U.S. government, would likely push Treasury yields higher as well.
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