Bond market rally may signal dark times to come

A torrent of terrible economic data has electrified the US Treasury market, driving the key 10-year note's yield lower and prompting investors to predict a further plunge. On Wednesday, the yield on the benchmark 10-year Treasury note fell below 3 percent, the first time since December, on further evidence the economic recovery is losing momentum - and fast.
That may be good news to investors who are long the Treasuries market, but for those who have money in stocks, commodities or other higher-risk assets, it could spell big trouble ahead.
Neither is it good news for the large number of unemployed people in the United States whose hopes of a jobs-creating recovery could be dashed. "It does look like we have a pretty weak rebound, even weaker than we had considered," said Jason Brady, a managing director for Thornburg Investment Management in Santa Fe, New Mexico.
The 10-year Treasury bond is one of the most widely watched securities as it sets the benchmark for almost every other interest rate in the US economy, from the cost of financing corporate debt and mortgages to credit card balances.
Many investors previously expected yields to rise - even spike - with the end of the Federal Reserve's latest bond buying program nearing and the economy experiencing a self-sustaining recovery.
But weakening employment and troubled housing markets, unresolved debt problems in Europe and Japan's struggle to recover from the earthquake have money managers reversing course. Dan Fuss, vice chairman of $150 billion Loomis Sayles, said on Wednesday he isn't ruling out a 2.50 percent yield on the 10-year Treasury note - 44 basis points lower than the current 2.94 percent at New York close on Wednesday.
"I emphasise that I give it low odds, but it is possible," Fuss said. It was only on February 9 that the 10-year's yield peaked at 3.78 percent. Bret Barker, portfolio manager at $120 billion TCW in Los Angeles, said he too isn't ruling out 2.50 percent on the 10-year's yield, but sees a 2.75 percent yield as more plausible.
"We hit 2.50 percent when Lehman Brothers collapsed and just before QE2 began with fears of a double-dip recession and deflation," he said. "We assign a low probability to both deflation and a double dip." The yield on the 10-year Treasury note hit an intraday low of 2.33 percent on October 8, 2010, ahead of the Fed's second round of bond purchases, also known as Quantitative Easing 2. But that doesn't compare to levels following Lehman's implosion when the 10-year yield intraday low was 2.04 percent on December 18, 2008.
Sean Simko, senior portfolio manager at SEI Investments in Oaks, Pennsylvania which oversees $179 billion in assets, said Friday's non-farm payrolls report could extend the bond market's moves.
"If Friday's payroll number disappoints, we could have another leg down in yield. It could press below 2.90 percent." US nonfarm payrolls likely increased by 150,000 in May, according to a Reuters poll, less than the 180,000 forecast before a report on Wednesday showed a sharp slowdown in private job growth last month. The bond market's explosive rally has even caught the world's biggest bond manager off guard.