U.S. government debt prices rose on Thursday as investors pivoted toward safer assets amid growing concerns about emerging market risk.
Though yields initially rose on Thursday, many on Wall Street blamed creeping risk fears in emerging markets for a late-day pivot toward safer assets like U.S. Treasurys.
Like credit fears in Italy last week, some fixed-income traders blamed the fall in rates on dormant worries about debt in emerging markets, including Brazil.
"There's been some chatter about Brazil and some hedge funds shorting the dollar, trimming their exposure there. It's very speculative," said Aaron Kohli, interest rate strategist BMO Capital Markets.
The exchange rate between the Brazilian real and the U.S. dollar, meanwhile, jumped 1.5 percent Thursday as investors began to bid up the price of American debt.
"I think this is definitely the kind of thing you start to see when the warm blanket of liquidity is pulled away from the market," Kohli added. "A lot of the central banks are trying to figure out the pain points when it comes to monetary policy."
Fears of overly aggressive central bankers aren't likely to ease ahead of the Fed's monthly meeting, set to occur Tuesday and Wednesday of next week.
The central bank is widely expected to hike the federal funds rate 25 basis points in its latest move to normalize the easy monetary conditions introduced in the wake of the financial crisis.
Though markets saw a June hike as all but assured Thursday morning, debate remains over how aggressive Chair Jerome Powell and his colleagues should be throughout the rest of 2018.
"I think what you're seeing over the past couple weeks or so is that U.S. Treasurys do maintain their safe haven status," said Greg Peters, senior investment officer at PGIM Fixed Income. "It's several things. Obviously, the situation in Italy: investors feel fearful over what it means for the euro zone broadly."
"Brazil has been a big investment theme over the past two years, so it's kind of a big move if investors are reading it as weakness in emerging markets," he added."
While the latest report on nonfarm payrolls again revealed strong gains across the economy, some economists worry that the pace of inflation is not yet hot enough to warrant further increases to the cost of borrowing capital.
Adding to those concerns, ECB Chief Economist Peter Praet on Wednesday said the bank will discuss next week how to temper its €30 billion ($35 billion) monthly purchasing program originally introduced to help revive the euro zone's economy following the sovereign debt crisis.
"Signals showing the convergence of inflation towards our aim have been improving, and both the underlying strength in the euro area economy and the fact that such strength is increasingly affecting wage formation supports our confidence that inflation will reach a level of below, but close to, 2 percent over the medium term," Praet said Wednesday.