Bond Markets: Why The 30-Year Bond Bull Run Is Dead

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The typically tame bond market turned tail and crashed even harder than stocks Wednesday after Federal Reserve Chairman Ben Bernanke told the Joint Economic Committee on Capitol Hill that the central bank may slow its bond buying spree when it sees continued improvement in the labor market.

Yields on benchmark 10-year Treasury bonds broke above 2% for the first time since March.

Stocks rallied to new highs while bonds soared in the morning as the market cheered Bernanke's testimony, which indicated the Fed would maintain its easy money policy.

Both stocks and bonds started spiraling south after Bernanke said during a question-and-answer session with Committee Chairman Kevin Brady, R-Texas: "If we see continued improvement and we have confidence that is going to be sustained, then we could in the next few meetings take a step down in our pace of purchases."

The Fed minutes released in the afternoon showed that several committee members supported tapering off asset purchases as soon as June. It was the first time the minutes mentioned a specific date as to when they would be willing to take their foot off the pedal, said Erik Johnson, U.S. economist at IHS Global Insight.

"While the committee probably won't deem the labor market strong enough to warrant a pullback that quickly, it may lay out a clearer timeline next month," he said. "As long as the labor market continues to improve, it wouldn't be surprising to see the Fed cut back on asset purchases a few meetings down the road."

SPDR S&P 500 ( SPY ) ended down 0.74% after having risen as much as 1.14% in morning trade.

IShares Barclays U.S. 20+ Year Treasury Bond Index ( TLT ) -- the largest fixed-income ETF -- fell 1.49% to 116.09, a two-month low. Yields on 20-year Treasuries jumped 8 basis points to 2.83%.

The only fixed-income ETF to post a gain wasMarket Vectors High-Yield Muni ETF ( HYD ), up 0.15%.

TLT plunged 5.63% month to date as benchmark 10-year rates climbed 0.37 percentage point month to date. It's particularly painful for bond investors considering the higher-risk SPY gained 3.91%.

Fixed-income investors face steeper losses as interest rates climb on expectations the Fed will end the party against a backdrop of improving employment, retail sales and housing markets.

At the same time central banks around the world are cutting their interest rates, making risk assets more appetizing. This month 12 countries -- including Australia, India and South Korea -- lowered their policy rates after the European Central Bank cut its key rate to a record low of 0.50% on May 2.

IHS Global Insight projects benchmark 10-year rates to average 1.75% in the second quarter, 1.85% in the third quarter and 2% in the fourth quarter. Rates are expected to average 2.5% in 2014 as the economy expands 2.8%. IHS projects 10-year yields to climb above 3% by 2015 when the economy recovers, growing at a 3.2% rate.

Srinivas Thiruvadanthai, director of research at the Jerome Levy Forecasting Center in Mount Kisco, N.Y., on the other hand believes it's questionable that the economy will grow next year and says it's highly unlikely in 2015 owing to weak economic growth around the world. He believes the global economy will fall into a recession again and 10-year rates eventually will dive to 1%.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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