Bond Bear Market Yet to Roar
Is the bond bear market here? Last week's sudden selloff in U.S. Treasurys, which dragged U.K. gilts and German bunds in its wake, has jolted the market. The driving force is a belief the U.S. and global recovery may be becoming self-sustaining.</br></br>Some are recalling the events of 1994, when an unexpected U.S. rate increase caused bond-market carnage. But so far, a rerun looks unlikely given that a sharp rise in rates would in itself put pressure on the nascent recovery. That should reassure investors in risky assets like stocks and junk bonds.</br></br>Ten-year Treasury yields have risen 0.36 percentage point in a week to 2.38%--in bond-market terms, a big move. That came after healthy U.S. employment growth, the majority of U.S. banks passing a severe "stress test" and the market dialing back expectations for more quantitative easing by the Federal Reserve.</br></br>The crucial question is how far yields might rise. That depends in large part on U.S. economic data. Further evidence that the U.S. recovery is gaining traction--in particular corporate spending, further job creation and rising household incomes--is bound to push yields higher. By one measure, they could rise sharply: Ten-year Treasurys were well above 4% the last time the S&P 500 was at its current level in mid-2008. That steep a rise would rival 1994's selloff--when 10-year yields rose to 8% from 5.9%--and could threaten the recovery in housing and the economy.</br></br>But many investors, disappointed by false dawns in recent years, may be slow to unload bonds. The euro zone and Middle East in particular still pose risks to the global economy. Interest rates are at zero, anchoring short-dated yields. Policy makers have expended much effort driving down long-term yields, and may yet seek to contain them. That may mean 10-year Treasury yields are just moving from panic levels to a new range between 2.10% and 2.60% for now. German bunds, meanwhile, look more insulated because of the lingering euro-zone crisis. Even after rising to 2.03%, 10-year bund yields remain well within their recent trading range. So investors could bet bunds outperform Treasurys.