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Why the Rise in Treasury Yields May Be OK

Thursday, 20 Jun 2013 | 1:00 AM ET
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As benchmark U.S. Treasury yields hit their highest level in more than a year amid fears about an unwinding of monetary stimulus, analysts say there's no reason to fret about the back-up in bond yields since the move is likely to be accompanied by the U.S. economy finally getting back on its feet.

Bond yields soared on Wednesday after the U.S. Federal Reserve suggested that it could start to unwind its monetary stimulus for the economy later this year.

The benchmark 10-year Treasury yield rose to about 2.38 percent on Thursday, its highest level in more than a year, and many analysts expect it to reach 3 percent by the end of the year.

(Read More:Market Consensus: Get Ready for 3% Treasury Yields)

"When the economy is operating normally, meaning you are close to full employment and the economy is growing close to potential, the 10-year U.S. Treasury yield should be around 4.5 to 5 percent, and so even with today's [Wednesday's] sell off we have a long way to get back to normal," said Mark Zandi, chief economist at Moody's Analytics.

"But normal is good – it would be good to get back to full employment and have an economy growing at potential, so I would take a 4.5 to 5 percent yield on the long bond if that comes with a 5.5 percent unemployment rate," he told CNBC Asia's "Squawk Box."

The U.S. unemployment rate is at 7.6 percent and the Fed has said it would keep interest rates near zero until unemployment drops to 6.5 percent and inflation rises to 2.5 percent.

(Read More: After the Fed – What's the Market's Next Move?)

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Quantitative easing (QE) or buying assets to pump money in to an economy to revive growth is viewed by many economists as an unconventional monetary policy tool when cutting interest rates alone is not enough to spur growth.

So if the U.S. economy is recovering to a point that those unorthodox tools are no longer necessary, than that's a positive sign even if it does mean higher government bond yields, analysts say.

"I think people see QE incorrectly, what QE does is buy bonds and push up prices and drops the yield and flattens the yield curve," Ken Fisher, CEO at Fisher Investments told CNBC Asia's "The Call."

"I don't care where you've been or what you've done, forever one of the leading economic indicators has been the yield curve and flattening the yield curve has always been a bearish thing not a bullish thing -- it reduces the propensity of banks to lend," he added.

The U.S. economy grew at an annual rate of 2.4 percent in the first quarter of the year and the Fed said on Wednesday it sees long-term gross domestic product (GDP) growth at between 2.3 percent to 2.5 percent.

(Read More: Goldman Sees Increased Risk of Tapering by December)

Bank of Singapore Chief Economist Richard Jerram said that while most economists had differing views on what trend growth for the U.S. economy is, the Fed's estimate was probably a reasonable one.

"We are having a normalization of the U.S. economy and we are going into a period of normalization and trend growth," Alain Bokobza, head of global asset allocation at Societe Generale told CNBC.

Some analysts said they expected buyers to move back into the U.S. Treasury market.

"I think yields can back up to 2.5 percent, but buyers will return to the market, Kirk West executive director at International Investments at Principal Global Investors said.

— By CNBC.Com's Dhara Ranasinghe, Follow her on Twitter: @ DharaCNBC