Bonds are selling off and it may be just the beginning

US Treasurys are selling off on Monday marking the third day in a row of rising yields and falling prices.

The selling is not quite as acute as Thursday and Friday’s trading, with the yield for the US 10-year bond rising just 1.4 basis points to 1.685% as of 12:25 p.m. ET.

Here’s a quick rundown of where the other major US Treasurys’ yields sit:

  • US 2-year: 0.798% (+0.8 bps)
  • US 5-year: 1.228% (+0.3 bps)
  • US 30-year: 2.395 (+0.4 bps)

According to Themos Fiotakis, macro strategist at UBS, the sell-off is a symptom of central bank noise from around the world including the European Central Bank’s decision to not extend its bond buying program after March 2017. Additionally, news coming out of the Federal Reserve and the Bank of Japan also has fixed income investors nervous.

Add these factors together and Fiotakis thinks this could lead to a prolonged sell-off in bond markets, but mostly outside of the US.

“In our estimates, a full back-up of EUR yields towards fair value and a coincident spike of Japanese yields towards early January levels, would push 10-year US yields towards the 1.90-1.95 region (from 1.67% currently),” said Fiotakis in a note to clients. “These potential moves are substantial but they should not be seen as a regime change for markets.”

Additionally, the fixed income strategy team at Deutsche Bank said that recent moves in the market and statements from central banks has caused them to raise their forecast for global yields. They now project the 10-year to hit 1.75% by the end of 2016 and 2% by the end of 2017.

The Deutsche Bank strategists, however, do not think this signals a huge shift in the bond market. Here are the strategists from a note to clients:

“Unfortunately, however, we remain sceptical that we are the verge of a major turning point in the multi-year global bond rally. That would require secular increases in productivity that we think will be at best slow to materialise due to demographics and other factors. Rather, we see our new forecast scenario as an upswing driven by changing policy stance within a stubbornly persistent low growth, low inflation, low yield equilibrium.”

Further commentary from the Fed comes at 1:15 p.m. ET with a highly anticipated speech from Fed Governor Lael Brainard, the final speech from a Fed member before the September meeting.

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