According to Torsten Slok, Deutsche Bank’s chief international economist, the 10-year Treasury yield is “significantly mispriced” and should in fact be at 2.3%, instead of 1.762%, where it closed on Thursday amid a strong rally as oil and stocks faltered.

The Atlanta Fed, on the other hand, is broadly viewed as one of the most accurate predictors of U.S. growth, as it uses the so-called GDPNow forecasting model, which provides what the central bank calls a “nowcast” — or real-time estimate — of the official GDP number prior to its release.

Furthermore, a series of data points, such as jobless claims, which hit a three-month low on Thursday; industrial production, which rose for the first time since July; and consumer spending, which rose in 2015 at its fastest pace since 2005, all showed improvement in the U.S. economy, said Slok said.

At the same time, fixed-income strategists pointed to another reason why Treasury yields have been hovering around one-year lows recently, namely a sustained global “flight to quality.”

These Treasury rallies pushed prices higher and yields lower not because of changes in economic fundamentals, but because of a massive flight to government bonds, which are perceived as haven assets, amid sharp global equity selloffs over the past few weeks, said Jeroen Blokland, a portfolio manager at Investment Solutions, in a note.

Eoin Treacy's view

Traders can never get enough of a good thing so when money is free and abundant they increase leverage and go in search of opportunities. The longer the trend persists, the larger the positions become as accrued profits are used to increase wagers. When the status quo changes they need to change strategy not least because margin calls necessitate action.  

Credit is drying up in the bond markets and that is having knock-on effects right across the markets.  Yields on sovereign bonds plunged while equities developed short-term oversold conditions. These overextensions are now being unwound with 10-year Treasury yields bouncing from 1.5%. Potential for a reversionary rally back upward the trend mean looks more likely than not.

The big question for both bond yields and equities is whether they can do more than unwind oversold conditions. Their ability to find higher reaction lows following the next pullback will be an important indicator of how solid recent support is. 

A US recession this year remains unlikely but stress in the bond markets suggests there is ample scope for continued volatility.