On the back of stronger US employment data, US bond yields have risen, and most maturities have returned to beginning of the year levels.  For example, 10-year Treasury yields were 2.1% on January 2, fell to 1.6% by the end of the month, and are back to 2.0%.  We think US 10-year Treasury yields will stay in a trading range between 1.6% and 2.4% until German 10-year bond yields, currently 0.28%, return to at least 1%.  

David Fuller's view

Here is The Weekly View.

There is an understandable logic to this conclusion which has been in play for years.  As German 10-year Bund yields continued to decline on deflation fears, this acted as a restraint on rallies for US 10-year Treasuries as investors opted for the higher yield of these two quality issues.

However, the February US jobs report, issued today, was surprisingly strong, driving 10-year Treasury yields up to 2.245% at the close.  In contrast, German 10-year Bunds remain very low at 0.393% today, although they have at least temporarily lost downside consistency since February.  Germany’s economy appears to be improving, which would ordinarily lift yields but the ECB will commence buying European bonds this month in a €60bn QE programme, which Mario Draghi says will continue until at least end-September 2016.

This yield differential may restrain US yields for a while longer.  Nevertheless, given that developed country bond yields have been at record lows in recent years, and the prospects for economic recovery appear to be improving, surprises over the medium term are very likely to be on the upside.  There are a lot more people currently holding US Treasuries, with profits to protect, than the number of potential new buyers who could conceivably keep yields near current levels.  The long burning fuse capable of triggering explosive rallies in Treasury yields is shortening every day.