Why the Fed is 'delighted' with bond markets: Analysts
U.S. government bond markets have stayed relatively benign in recent weeks, proving that fears of taper-induced volatility were unfounded and analysts told CNBC the Federal Reserve should be pleased with the recent moves.
All eyes are on Fed chair Janet Yellen's first testimony before Congress on Tuesday, as investors attempt to predict whether the well-known dovish economist will continue tapering at $10 billion a month or pause following a string of weaker-than-expected data.
(Read More: Markets wait on Fed Chair Janet Yellen)
Simon Warner, head of fixed income at AMP Capital, told CNBC Asia's Squawk Box on Monday the recent behavior of the U.S. government bond market will give Yellen an extra spring in her step.
"The lack of inflationary pressure is keeping a lid on the long end of the bond market along with some of these concerns we have around the world. So I would have thought the Fed would be delighted about the way the bond market has traded since their move in December," he said.
(Read more: Good time to buy bonds? 'Absolutely not')
Yields on 10-year U.S. Treasurys rose 138 basis points between May and late December, following the Fed's first mention of tapering through to the central bank's first stimulus reduction of $10 billion a month. The rapid nature of the spike prompted worries that the economic recovery could be derailed as long term U.S. government bond yields - which determines mortgage rates - rose too quickly.
Ten-year Treasury yields have since settled back down to 2.67 percent, despite the announcement of a further $10 billion reduction in January.
Warner said it was now clear that all the hype about a rapid spike in bond yields was overblown.
(Read more: Markets fear US chilled by more than weather)
"The one thing that hasn't really been talked about in the last six weeks or so is how benign the bond market has been," he said. "All this talk about how rates were going to spike higher, and [how] emerging market concerns were due to higher rates in the long end, is clearly garbage. There's no pressure in the long end of the curve at all."
Viral Bhuta, portfolio manager, fixed income at UTI International Singapore, said the fact that bond markets have settled down demonstrates that investors are more relaxed about the tapering schedule.
"Uncertainty around the tapering schedule will reduce as the Fed continues to communicate with investors, allowing volatility in the bond market to cool off," he said.
Bhuta added that he expects yields on the 10-year Treasury to gradually tick up to 3 percent again as the U.S. economy improves throughout the year.
"To a great extent, the U.S. bond market will be data driven, especially by growth and unemployment numbers. The Fed won't be watching yields, they'll be totally focused on employment and inflation data," he added.
Manpreet Gill, senior investment strategist at Standard Chartered, also said he expects long-term rates to gradually drift above 3 percent in the first half of this year, but said the Fed could run into problems in the second half of the year.
“In the second half of this year, however, the market is likely to begin questioning when the Fed is likely to commence raising rates, even if the actual event is some time away. This may lead to the Treasury curve creeping higher across the board. For the 10-year we are looking for yields to reach approximately 3.5-3.75 percent by the end of 2014,” he said.
Recent U.S. economic data have raised a few eyebrows, however, although much of the weakness has been blamed on an exceptionally cold winter.
On Friday, January's non-farm payrolls report showed 113,000 jobs were created last month, well below estimates of 185,000, while the jobless rate fell to 6.6 percent versus expectations of 6.7 percent.
The data did prompt a small reaction from bond investors with yields initially falling, before reversing course, to settle at 2.68 percent.
— By CNBC's Katie Holliday: Follow her on Twitter