The bond market is based on a “powder keg”, according to ING strategist


Investors looking to recover from last week’s US bond market sell-off might not get much rest.

“The bond market has been sitting on a powder keg since last week. The attitude towards duration of bond investors has become cautious, to put it mildly, ”said Padhraic Garvey, regional head of research for the Americas at ING, in a note on Thursday, and predicted that the bond rate at 10 years would climb to 2% this year.

Fears that trillions of dollars in congressional fiscal stimulus would force the Federal Reserve to withdraw accommodation measures earlier than expected helped push down bond prices and 10-year Treasury yields TMUBMUSD10Y,
at 1.60% last Thursday, according to some estimates.

This movement has spread to other pockets of Wall Street as well. Last week the Dow DJIA,
+ 0.10%
lost 1.8%, the S&P 500 SPX,
+ 0.15%
fell 2.5%, and the Nasdaq Composite COMP,
was down 4.9%.

See: The gauge of inflation expectations on the bond markets reaches its highest level since 2008

Since then, the maturity of the benchmark bond has found its place. The 10 year note has mainly traded below 1.50% throughout this week.

Still, the rapid rise in bond yields in recent weeks has put Treasuries on pace with their first negative annual return since 2013, the year of the so-called “taper tantrum,” according to Bloomberg data.

“Against this backdrop, we don’t blame investors for pulling out at the first sign of a sell-off,” Garvey said.

He found signs that the bearish impulses in the bond market were wearing off, however, noting that the yield on 5-year bonds was depressed relative to 2-year and 10-year bonds. In the past, the sharp rise in short maturities has suggested a broader and more painful liquidation of the bond market.

Read: History suggests surging bond market rates shouldn’t last, says Guggenheim’s Minerd

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