Bond Yields Getting Closer to Pain Threshold

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The scale of the sell-off in U.S. government bonds has taken market watchers by surprise and yields are now fast approaching a "pain threshold" that could make the Federal Reserve think twice about unwinding its monetary stimulus too soon, analysts say.

Yields on benchmark 10-year U.S. Treasurys soared after Friday's stronger-than-expected U.S. non-farm payrolls data heightened fears among bond investors that an unwinding of the Fed's monetary stimulus could come sooner rather than later.

(Read More: One Eye on Earnings, the Other on Bonds)

"I think 3 percent is the key threshold, but if you'd asked me a few weeks ago, I would have said 2.5 percent – it keeps moving higher and yet there doesn't seem to be an imminent impact on the U.S. economy," Frederic Neumann, co-head of Asian Economics Research at HSBC Bank told CNBC Asia's "Squawk Box."

"But 3 percent is likely to be, not just a material threshold, but a psychological line in the sand for [Fed Chairman Ben] Bernanke at the moment," he added.

The 10-year Treasury yield rose to about 2.76 percent on Monday in Asia, its highest level since August 2011 and within 25 basis points of that key 3 percent level.

(Read More: A Busy Week for Asia's Central Banks)

It has jumped more than a 100 basis points since early May as investors start to anticipate an easing in the Fed's $85-billion-a-month bond-purchase plan that has helped keep Treasury yields down.

According to the tweets from one Reuters correspondent, U.S. investment bank Goldman Sachs now expects the 10-year Treasury yield to rise to 4 percent by 2016.

Too Fast, Too Soon

The problem with yields rising too high, too soon is that they could derail a recovery in the housing market, and in turn the economy, since yields on Treasurys affect the interest rates on fixed-rate mortgages, analysts say.

"The rise in bond yields is going to have implications especially since the housing recovery is still nascent," said Nizam Idris, the head of strategy for fixed income and currencies at Macquarie.

"If I were the Fed I would err on the side of caution and try and talk this rise in yields down," he said, adding: "Bernanke is speaking on Wednesday and he could try and tone the expectations on Fed tapering."

Wall Street expects the Fed to start easing its quantitative easing program in November, one month earlier than previously forecast, according to a CNBC survey conducted after Friday's U.S. payrolls report showed the economy generated a stronger-than-forecast 195,000 new jobs last month.

(Read More: Wall Street Bumps Up Fed Taper Forecast: CNBC Survey)

"If yields go up too quickly that could put a break on the housing market and that's more important at the moment than earnings season for Fed policy," said HSBC's Neumann, with reference to the U.S. earnings season that kicks off this week.

Even with the sharp sell-off in Treasurys that has hurt high profile bond investors, some long-term funds remained upbeat.

Here's a tweet from Pimco head Bill Gross over the weekend.

Pimco's Total Return Fund, the world's largest bond fund run by Gross, had outflows of $9.6 billion in June, the biggest on record, data from Morningstar showed last week.

-By CNBC's Dhara Ranasinghe; Follow her on Twitter: @DharaCNBC