"For the near term at least, you're in a situation where yields are going to go lower and valuations will continue to be stretched," said Craig Bishop, lead strategist, U.S. Fixed Income Strategies Group at RBC Wealth Management. He noted the U.S. Federal Reserve is not likely to raise rates until next year, keeping rates low.
This year, globally accommodative policy has sent benchmark bond yields to historic lows, including negative territory. The chase for yield and relatively better U.S. economic growth have also sent U.S. stocks to record highs.
"I think people are still looking at the absolute yield of the U.S. versus the rest of the world without taking in the impact of the rising inflation we're going to see in a few months," said Bryce Doty, senior fixed income manager with Sit Investment Associates. "We're probably going to see decent flows into bonds."
In other developed markets, Japanese stocks have come under pressure from the strong yen, despite the Bank of Japan's stimulus efforts, and post-Brexit uncertainty has weighed on European equities.
BlackRock is underweight European equities and neutral U.S. and Japanese stocks.
However, with such heavy positioning, investors could find themselves on the wrong side of the trade if trends reverse. Inflation is showing signs of picking up, and the U.S. Federal Reserve is still on pace to raise, not lower, rates. Analysts also note that market momentum is pushing overseas yields further into negative territory and a turnaround in sentiment would likely cause a sharp drop in price.
"That's a concern, something investors need to be aware of. … I think it'll be up to central banks to manage that process as we go forward to prevent that kind of environment, such as the taper tantrum as we saw in 2013," Bishop said.
When the U.S. Federal Reserve indicated in mid-2013 it would wind down its monthly bond purchases, or quantitative easing, stocks dropped and yields rose.