The 10-year treasury yield topped 2.48%, while the 30-year yield climbed above 3%, with the odds of a rate rise in the US this month having climbed to over 80%, according to some sources.
For Jim Cielinski, global head of fixed income at Columbia Threadneedle, the bond bubble has burst, though it remains to be seen how quickly the fallout may spread.
Whatever the outcome of Fed policy action, he believes the “rules of the game have changed” and higher yields appear likely as this cycle unfolds.
“With much of the overvaluation eradicated, we now find ourselves in the ‘wait and see’ phase of the sell-off,” he said.
“Precise details and timing for much of the Trump plan remain incomplete, making it difficult to assess implementation risks.
“Realisation of all of Trump’s campaign promises will push yields to new cyclical highs. Missteps and delays, however, may put the brakes on the sell-off and could even temporarily reverse it.”
Simon Brett, CIO at Parmenion Investment Management, believes there is a risk bond markets could react badly if interest rates rise above expectations, both in the US and the UK, should central banks fear they are behind the curve in combating inflation.
Still, he does not necessarily believe the 30-year bond bull market has come to an end just yet.
“Yes, in all likelihood interest rates are going to rise from here, but you have to take into account the scale of the rise,” he explains.
“Over the very long term, high interest rates are the exception, not the rule. I’m not convinced there will necessarily be a bloodbath in bonds.
“If interest rates rise up, then you’ve got to add back in the dividend or the interest coupon you will receive to offset that. So, I am cautious, but I can’t see the bond bubble bursting. Some people get very emotive about it, but let’s wait and see.”
