US bond yields rose towards their highest levels since the start of the year on Wednesday before the sell-off was stemmed with the release of a stable April consumer inflation report.
Bond yields have been rising since mid-March when systemic financial fears abated with the rescue of Bear Stearns.
On Wednesday, the yield on the two-year note reached a high of 2.6 per cent, more than double its 1.25 per cent low of March.
The ebbing of safe-harbour buying has pushed yields higher and the move has been compounded by economic data that suggest the risk of a recession has abated. Fiscal stimulus cheques are being sent out to many taxpayers and that is expected to help boost consumption for the next two quarters.
Jay Mueller, senior portfolio manager at Wells Capital Management said recent economic data had been by no means good, but better than what some people had feared.
As a result, interest rate futures suggest there is even a chance that the Federal Reserve will start raising rates later this year.
However, views vary on the possible timing of any shift in monetary policy.
Mr Mueller said: “The Fed is unlikely to raise rates this year”. He added that the central bank will likely wait to see how the economy fares for a quarter once the stimulus cheques are spent.
News that headline inflation rose 0.2 last month, while the core rate, which excludes food and energy, was up 0.1 per cent eased selling pressure in bonds.
TJ Marta, fixed income strategist at RBC Capital Markets, said: “This report will take some of the inflation concern out of the market.
“The market will likely continue to gyrate as growth and inflation risks wax and wane.”
The yield on the 10-year Treasury note approached 4 per cent early on Wednesday, its high for the year. It had eased to 3.94 per cent at mid-afternoon in the wake of the inflation report..
Since mid-March the 10-year has risen from about 3.30 per cent.
The latest survey of global fund managers by Merrill Lynch, says 80 per cent of investors believe long-term bond yields will be higher a year from now.
Such a move could hurt the US economy as fixed mortgage rates are priced over long-term bond yields.
A sustained rise would compound falling house prices and rising foreclosure rates.
David Bowers, independent consultant to Merrill Lynch, said: “A sharp rise in bond yields could help convert this financial crisis into an economic crisis.
“There are growing concerns about a stagflationary environment.”
