US bond market faces possible reckoning

NEW YORK, June 1 (Reuters): The rally in US Treasury bonds surprised many, taking 10-year yields to their lowest levels in 11 months. Jobs data and the European Central Bank meeting next week will determine whether bond prices have further to go.

The bond market's rally is the result of a confluence of factors - falling yields in Europe, extra demand from pension funds, concerns among investors about long-term economic demand and technical factors, including short-covering from those who thought bond yields were headed higher.

Prices have jumped, pushing the yield on benchmark 10-year US Treasuries Thursday to 2.422 per cent, the lowest since last June, despite the US Federal Reserve's easing back on its bond-buying stimulus programme.

Investors aren't convinced that the Fed is cutting stimulus because of an impending surge in growth. Instead, they're more worried about weak economic indicators and a lack of inflation, which could change in the case of a strong jobs report or data showing price gains.