NEW YORK (Bloomberg) - Maybe, just maybe, this whole bond rout is ending.
The global selloff that's set investors on edge finally slowed last week, and some analysts are saying the worst is over. US treasuries look fairly valued given the outlook for inflation and interest rates, according to Bank of America - although with plenty of caveats. In Germany, options traders convinced a bund-market crash was all but inevitable less than two weeks ago have scaled back most of those bets.
Goldman Sachs warns that government debt is still expensive, but a growing number of investors are finding value after the four-week exodus sent bond yields soaring. Prudential Financial Inc.'s Robert Tipp is buying because tepid U.S. growth will keep the Federal Reserve on hold on interest rates, while Europe remains too weak to sustain higher yields.
And don't forget about central banks in Europe and Japan, which are buying billions of dollars in bonds each month.
"There's a good chance people will look back at this as having been a good buying opportunity," said Tipp, the chief investment strategist at Prudential's fixed-income unit, which manages US$560 billion.
Ten-year U.S. notes posted their first weekly gains since April 17, while German bunds pared some of their losses.
That lessened the pain of a selloff that lopped off hundreds of billions in market value from sovereign debt in the developed world, data compiled by Bloomberg show.
The retreat first began in Europe as signs of inflation emerged with the ECB's most-aggressive quantitative easing yet. Bond yields surged, especially in markets such as Germany where negative rates prevailed, then quickly spread around the world as DoubleLine Capital's Jeffrey Gundlach and Federal Reserve Chair Janet Yellen suggested bonds were overpriced.
Yields on 10-year Treasuries, which reached a low of 1.82 per cent in April, rose to 2.36 per cent on May 12 before ending the week at 2.14 per cent.
In Germany, where average yields for the entire market dipped below zero for the first time ever last month, bunds soared to 0.78 per cent before falling to 0.62 per cent Friday.
The speed and magnitude of those losses still pale in comparison to previous market meltdowns, including the "taper tantrum" that then-Fed Chairman Ben S. Bernanke touched off in May 2013. And there's little chance of a repeat now, even if yields jump further in the near-term, according to Priya Misra, Bank of America's head of U.S. rates strategy.
Not only has a raft of U.S. economic releases - from retail sales to consumer confidence and factory production - been so disappointing, the data hasn't nearly been strong enough to trigger the kind of inflation what would prompt bond investors to demand much higher yields.
Lower inflation and tepid growth in the U.S. still mean there's less room for the Fed to surprise the market, unlike in 2013. That's when Bernanke shocked investors with his comments about reducing the Fed's bond buying and prompted them to move up their projections for when near-zero rates would end.
To David Ader, the head of government-bond strategy at CRT Capital Group, the latest bout of selling had more to do with panic-stricken buyers fleeing the same trades they all crowded into, rather than a change in the underlying economic outlook.
While deflation worries have ebbed in Europe, economists surveyed by Bloomberg expect consumer prices this year to rise 0.1 per cent for the 19 nations that share the euro.
That, plus the fact the ECB plan to keep buying sovereign debt through September 2016 means yields will remain anchored.
"It was a panic, vomitous, puke of positions," Ader said. Now, "we're reversing course."