The longest losing streak for ten-year US treasuries since 2006, coupled with a marked rise in other ‘safe haven' bond yields, poses some difficult questions for bond investors.
Having remained remarkably calm since the start of the year, benchmark treasuries and gilts have sold off sharply this week as the prospect of improving US growth appears to take QE3 off the table.
Benchmark ten-year treasuries have seen yields rise from 2% to 2.3% in just three days, as part of a seven day losing streak that Bloomberg labels the worst since 2006, while 10-year gilt yields have also spiked to 2.4% - not helped by Fitch warning on the UK's AAA rating or chancellor George Osborne's mooted plans for a 100-year UK bond.
Fund managers and asset allocators had been warning of the prospect for capital losses in US and UK sovereign debt even before yields hit record lows last year, and AXA IM fixed income CIO Chris Iggo sees this week's moves as the start of something significant.
The longest losing streak for ten-year US treasuries since 2006 poses difficult questions for bond investors
Iggo suggests the sell-off could mark the beginning of bond yields' move back to levels seen before the acute phase of the European debt crisis last year.
Ten-year gilts and treasuries were both yielding over 3.5% prior to the major market stresses seen in 2011.
"The recent rise in bond yields may prove to be temporary - a short term response to the easing of risk in Europe. However, it is more likely that we are currently seeing the normalisation of the structure of risk-free bond yields," Iggo said.
Barclays Capital's global macro team, meanwhile, suggests the positive economic news from the US is providing a "refreshing change for global markets" by severing the link between the US dollar and events in Europe.
The analysts noted that support for the dollar is now materialising from strong US data rather than fear over Europe - ending the correlation between the euro and risk assets and having a knock-on effect on longer-dated paper.
"This positive twist has extended the rally into equities and steepened the US treasury curve, exerting pressure on duration globally," they said.
At Nomura, strategist George Goncalves said the move in treasury prices may also be down to European fixed income allocations returning to domestic markets.
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