BUSINESS NEWS
Brighter economic prospects, diminishing fears about a U.S. fiscal crisis and the idea that the beginning of the end is in sight for a period of ultra-easy monetary policy have sent government bond yields racing higher at the start of the year.
Yields on benchmark Treasurys have fallen some 200 basis points in the past five years as investors overlooked U.S. fiscal woes and hefty debt issuance to snap up safe-haven bonds in the face of a weak economic growth and volatile stock markets.
Even as many analysts predicted a bursting of the bond market "bubble" last year, yields continued to decline amid risk aversion.
(Read More: Predictions That Went Wrong in 2012)
But the sell-off seen in the early days of 2013 may be a taste of more to come, analysts say.
Who Needs a Safe Haven?
In a sign that risk appetite, to the detriment of the safe-bond market, is coming back in force, the VIX index, a popular gauge of fear in the equity markets plunged almost 40 percent last week.
(Read More: Why VIX's Recent Plunge May Be Bad for Stocks)
Kathy Lien, managing director at BK Asset Management in New York, says that the fall in the VIX index and spike in bond yields are the two most interesting developments in financial markets at the start of the new year.
"The increase in yields and decline in Treasury prices reflects worries that the Federal Reserve could end asset purchases in 2013. The "fiscal cliff" deal also removed some risk in the market, encouraging investors to dive back into riskier assets," she said in a research note.
Markets are starting to ponder whether the Fed will end its bond purchase program before the end of the year, after minutes from the Fed's December meeting released last week showed growing unease on continuing the buybacks.
(Read More: As Risk Appetite Returns, What Next for Treasurys?)
But with the economic recovery still in its early stages, unemployment still high and inflation contained, financial markets are not expecting the Fed to tighten monetary policy anytime soon.