Don't bet against the U.S. bond market rally anytime soon.
Conflicts in Ukraine and the Middle East, and record low bond yields in Europe, have unleashed a stampede into Treasurys, knocking benchmark 10-year yields to 2.30 percent, a 14-month low at one stage on Friday. They ended the week at 2.34 percent.
The U.S. bond rally, which accelerated on Friday after Ukraine claimed its artillery destroyed part of a Russian armored column that entered its territory, has shown earlier market calls from some leading bond investors, such as DoubleLine's Jeffrey Gundlach, to be on the money.
"We are in a market environment now that is largely beyond fundamentals," said Chris Orndorff, portfolio manager at Western Asset Management in Pasadena, California, a leading U.S. bond manager that has about $470 billion in assets. "The falling yield levels are a reaction to panic, as U.S. Treasurys continue to play the role that they have always played, the favorite asset in a flight-to-quality environment."
U.S.-based funds that invest primarily in Treasurys have attracted inflows for four straight weeks, accumulating more than $4.5 billion of new investor cash in that run, according to Lipper, a unit of Thomson Reuters. The four-week moving average of flows shows investors moving into this sector at the fastest pace in nearly six months.
Meanwhile, more speculative investors such as hedge funds, have reversed their recent short positions in 10-year Treasury futures and options. The latest week's Commitments of Traders data from the Commodity Futures Trading Commission showed speculators were net long by about $374 million after being net short by $616 million the week before.
The latest bull run in bonds has defied expectations of those traders and investors who had bet on U.S. interest rates rising this year as the U.S. jobs picture improved and the Federal Reserve paved the way to tighten policy in 2015.
Bond yields could decline further if, as expected, Fed Chair Janet Yellen reiterates her concerns about underlying weakness in the labor market in her speech next week at a global central bankers conference in Jackson Hole, Wyoming.
"She is going to remind us why they would maintain a dovish policy stand," Jeffrey Rosenberg, chief investment strategist for fixed income at New York-based BlackRock, the world's biggest asset manager with $4.3 trillion in assets.
Bond analysts and managers interviewed by Reuters on Friday said the 10-year yield could fall another 10-15 basis points. They didn't rule out it reaching the 2 percent level in the current rally.
Still, they warned that if global political tensions ease, the safe-haven demand for U.S. bonds will subside. Then, the 10-year yield could snap back to 2.60-2.70 percent.