Against this backdrop, three questions will determine the future path of bond yields.

The first is will net private savings remain sufficient to absorb the foreseeable debt issuance of governments in industrialised countries? The answer hinges on the future path of economic recovery. Should it continue and possibly even gain momentum, the corporate sector will need more capital for investments and private households for residential investment. Also, the fairly high savings rate of private households in the EU could be reduced somewhat once the labour market stabilises. As a result, demand for government bonds would be lower and interest rates would increase. Presently an ongoing recovery seems to be the most plausible case. Growth may lose some momentum in the US and in China, but it is likely to stay positive as well as in the EU and many emerging markets.

The second big question concerns inflation. Post-recession experience suggests that inflation remains subdued for quite some time after a downturn of production. This seems to justify mainstream forecasts that inflation will remain low in 2010 and 2011. Inflation should not become a major argument for central bank rate hikes or sharply accelerating inflationary expectations that could push up bond yields. The medium-term path of inflation is less clear, depending primarily on the ability of central banks to rein in abundant liquidity and to step up rates when inflationary expectations do rise.

Eoin Treacy's view US Treasuries have been among some of the best performing assets this year as fears of a major European default fuelled safe haven trades. More recently, concern over the USA's budgetary crisis have been sidelined at least in part because growth remains muted and investors are beginning to assume that short-term interest rate hikes will be some way off. 2-year yields continue to drift lower and at 0.53% currently suggest investors are not expecting interest rates to rise significantly for quite some time.

10-year TIPS yields have fallen back to retest the 1% level again. The rate has rallied from this area on three previous occasions but an upward dynamic will be needed to indicate a similar return of supply dominance on this occasion. At these levels, TIPS are suggesting inflationary pressures are the last thing on the minds of investors but if commodity markets continue to rally, this may prove to be a short lived phenomenon.

Momentum traders have done well from the performance of US Treasuries and other major sovereign bond markets and nothing has happened to shake the bulls out of their positions. The recent impressive rebound in equities and commodities has so far not been enough to initiate a major asset class switch. Many continue to assume that additional quantitative easing will support prices indefinitely but I wonder how long this can go on for before investors begin to ask how governments can afford such largesse? I suspect that at a minimum our the purchasing power of our savings will continue to suffer.

5-year notes have rallied back to test an area of potential resistance in the region of the 2009 highs just above 120. The two-month trend remains consistent and a sustained move below 118.50 would be required to question scope for further upside. Due to the interest differentials between 2009 and now, the corresponding yield is still somewhat above the 2008 low but also remains in a consistent decline where a sustained move above 1.8% would be required to break the progression of lower rally highs and indicate supply has regained the upper hand.

10-year Treasury prices have sustained a progression of higher reaction lows since April and these would need to be taken out with a sustained move below 122 to question potential for further upside. However, the psychological 125 area is only a couple of points higher and that may by an area of potential resistance. The 10-year yield broke downwards from the yearlong range in June and a sustained move back above 3.2% would indicate a return to supply dominance.

30-year prices have a relatively similar pattern with the most recent higher reaction low in the region of 126. 30-year yields have paused at the lower side of the yearlong range, in the region of 4%. A sustained move above 4.12% would break the progression of lower highs and further question the consistency of the 4-month downtrend.

There is a high degree of commonality across sovereign debt markets. These yield charts speak for themselves: Japanese yields are accelerating lower. Swiss and German yields have fallen to well below their 2005 and 2008 lows. UK, Canadian, Australian and New Zealand yields all look susceptible to further weakness.

Although some of the above yields are oversold on just about any measure, we have no evidence just yet that the move is over. However, the advance in prices is looking mature and I continue to believe the market to be higher risk that other asset classes such as equities, commodities and cash-flow postive corporate bonds.