| NEW YORK
NEW YORK May 30 The rally in U.S. Treasury
bonds surprised many, taking 10-year yields to their lowest
levels in 11 months. Jobs data and the European Central Bank
meeting next week will determine whether bond prices have
further to go.
The bond market's rally is the result of a confluence of
factors - falling yields in Europe, extra demand from pension
funds, concerns among investors about long-term economic demand
and technical factors, including short-covering from those who
thought bond yields were headed higher.
Prices have jumped, pushing the yield on benchmark 10-year
U.S. Treasuries Thursday to 2.422 percent, the
lowest since last June, despite the U.S. Federal Reserve's
easing back on its bond-buying stimulus program.
Investors aren't convinced that the Fed is cutting stimulus
because of an impending surge in growth. Instead, they're more
worried about weak economic indicators and a lack of inflation,
which could change in the case of a strong jobs report or data
showing price gains.
Since it's far from certain how the jobs data will come in
or how forcefully the ECB will act, the bond market is likely to
remain on edge.
David Keeble, global head of interest rates strategy at
Credit Agricole Corporate and Investment Bank in New York, said
a decent jobs report could "remind us that we have to get back
to the reality that the economy is picking up."
Employers are expected to have added 215,000 workers in May,
according to a Reuters poll, following an increase of 288,000
in April, which was the biggest gain since January 2012.
While the labor market continues to heal, it has not been
enough to jump-start wages, the most potent factor in kindling
"The key is wages moving higher and inflationary
expectations starting to move higher," said Quincy Krosby,
market strategist at Prudential Financial, based in Newark, New
Expectations that the ECB will announce more aggressive
action next Thursday to boost the euro-zone economy have also
helped drive U.S. and European bond yields down to levels not
seen in a year. Benchmarks in Italy and Spain have dropped
dramatically, making U.S. rates look attractive by comparison.
Part of the drop in yields stems from investors trying to
exit earlier bets on rising yields. Some bond fund managers were
stung by a bet on lower five-year note yields and higher 10-year
yields, a strategy favored by many hedge funds heading into the
"These positions have underperformed so far this year as the
yield curve has flattened and bond yields have fallen," Wells
Fargo analysts wrote in a note.
The bond market's price gains could be far from over, given
But if the market's direction reverses and yields move
higher, they could do so in rapid fashion.
"It's like playing a game of Russian roulette with the bond
markets right now," Keeble said. "You know something is going to
go 'bang,' and you just don't know when."
(Wall St Week Ahead runs every Friday. Questions or comments
on this column can be emailed to:
(Reporting by Caroline Valetkevitch; Editing by Jan Paschal)