Treasuries fell for a second day before a report forecast to show strength in the U.S. labor market, damping refuge demand as the Federal Reserve considers an interest-rate increase for later this year.

Benchmark 10-year yields rose and equities gained as futures markets are pricing in a 58 percent chance of rates rising by September even as a Fed measure of inflation expectations, known as the five-year, five-year forward, dropped to the lowest level since 2001. The new-year rally in global sovereign bonds paused after driving yields to record lows as plunging oil prices lowered inflation projections.

“The market got a little bit carried away,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. “I don’t think the yields make a lot of sense. The Fed in the middle of this year will nudge rates higher.”

Eoin Treacy's view

The outsized move in bonds relative to what was a modest pullback for the stock market suggests nervousness on behalf of investors that the stock market’s consistent advance will persist. With today’s rally on Wall Street, bouncing again from the region of the 200-day MA, the requirement to load up on Treasuries has dissipated at least for the short term. 

US 10-year Treasury yields found support this week in the region of the October low and a sustained move below 1.9% would be required to question potential for an unwind of the short-term overbought condition.