The rally in bond markets of late has been startling. As hopes grow that inflation may have peaked, and evidence of a U.S. economic slowdown build, benchmark 10-year Treasury yields
fell from around the 3.5% level touched in mid-June, to near 2.5% at the start of this week. A 100 basis point retreat in less than two months is a very sharp move, and unsurprisingly it had some observers questioning whether the market had overshot. Sure enough, some hawkish commentary from Federal Reserve officials on Tuesday saw yields bounce in one of the biggest shifts in five years. Little wonder the MOVE index that tracks Treasury volatility remains elevated.
But Bank of America rates strategist Bruno Braizinha says that though “the easy part of the rates rally is behind us” it’s likely benchmark yields could drop further. “The recent pivot in market focus away from inflation and towards deteriorating growth fundamentals pushed 10-year Treasury yields towards its fair value range faster than we had anticipated,” says Braizinha in a note.
Source: Bank of America
“A further rally from here is possible and even likely, but how much further depends on a series of fundamentals and more technical drivers,” he adds. One of these is the likelihood that the bond market is underestimating the risk of …