Analysts predict a potential spike of up to 5%, a disorderly sell-off for the markets

Ten-year Treasury yields rose to a striking 4.70% this month, the highest since early November 2023, amid a toxic mix of higher inflation, a stubbornly resilient economy and revised expectations around Interest rate cuts by the Federal Reserve.

Adding to the discomfort, Fed Chairman Jerome Powell recently indicated that the latest economic data does not strengthen confidence that inflation will move towards convergence soon the Fed’s 2% target.

The tension in the bond market is also reflected in the performance of related instruments, such as the U.S. Treasury 10-Year Note ETF (NYSE:UTEN), which fell 2.9% in April, making it the most challenging month since September 2023.

Longer-dated Treasury Exchange Traded Funds (ETFs), such as the iShares 20+ year government bond ETF (NASDAQ:TLT), fell even more, down 5.6% month to date.

Chart: The yield on 10-year government bonds keeps an eye on the red line of 5%

Analysts are reconsidering the Fed’s next moves: Vanguard issues alerts when rates hit 5%

The landscape of Fed policy expectations is being redrawn by analysts who until recently did not expect such aggressive shifts in Treasury yields. Few anticipated that interest rates would approach levels that could destabilize the market.

Still, Ales Koutny, head of international rates at Vanguard, issued a stark warning: “We are in a danger zone right now.”

Koutny believed that crossing the 4.75% interest rate threshold could lead to a serious sell-off, pushing rates to or above 5%.

As recently reported by BloombergLate last year, investors flocked to government bonds, anticipating a rapid easing of Federal Reserve policy. However, resilient US economic data have tempered these expectations, turning the tide against market optimists.

Koutny revealed: “We still think there is some remaining long position left.” The lack of orderly adjustment of these positions could trigger a chaotic market sell-off, risking interest rates rising to critical levels.

Despite the prevailing negative market sentiment, the current high interest rates have led to opportunistic purchases.

The latest data from JPMorgan Chase & Co. indicate a significant shift in investor positioning towards government bonds, marking the first net long position since March.

Robust demand was further evidenced by a successful auction of 20-year government bonds, which closed at a slightly lower yield than expected, indicating market confidence in government bonds despite broader concerns.

Read now: Fund managers are most optimistic since 2022: ‘Bull sentiment not quite at close-your-eye-and-sell level’

Photo: Shutterstock

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This article Government bond yields heading towards ‘danger zone’: analysts predict potential spike to 5%, disorderly sell-off for markets originally appeared on Benzinga.com

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