By Davide Barbuscia

NEW YORK (Reuters] – While the U.S. bonds market continues to be hammered by interest rate jitters, investors are beginning to believe that a potential slowdown of price pressure along with support from yield seeking buyers may soon place a ceiling – or at least a pause – on rising yields.

U.S. Treasuries had their worst start in the year and selloffs in certain parts of the curve have continued after U.S. Federal Reserve increased its benchmark overnight rate by 50 Basis points. It also announced that it will begin trimming its balance sheet next month, in order to offset unabated inflation.

Nevertheless, for investors, most of the inflation-driven weakness of bond markets is priced in. While there are still upsides, yields may start to subside soon as the Fed tightens financial conditions.

“We’re probably getting closer to the peak in terms of yields,” said John Madziyire, a senior portfolio manager and head of US Treasuries and Inflation within Vanguard’s Fixed Income Group.

His words were: “Yields may still be higher due to volatility being so high but we are probably approaching a point when we’re pricing yields high and buyers will begin to be attracted to these levels.”

On Monday, the yields of U.S. 10-year government bonds (a reference for mortgage rates) hit a new high of 3.2%. It was last at this level in November 2018. It will surpass the 2018 levels if it breaks below 3.26% and reach 2011 levels.

Brian Reynolds, Reynolds Strategy’s chief market strategist, said that 2011 and 2018 were two highly emotive events in bond markets history. 2018 was a year investors felt “frightened by the Fed tightening to infinity,” while 2011 saw the United States lose its triple A rating.

Yields had already blasted past expectations. According to Reuters, fixed income specialists project that the 10-year bond will increase by 2.60% within a year.

However, after hitting 3.2% Monday, yields dropped back to about 3% as stocks plunged due to rising interest rates, and an economic slowdown China following a recent increase in coronavirus infections.

Mike Vogelzang (chief investment officer at CAPTRUST), stated that “the momentum in the upwards push of interest rates seems slowing a bit.” He also pointed out relatively stable yields for two-year U.S. bonds. Prices have reflected Fed rate hikes in this year.

The two-year yields on 2-year notes, which are sensitive to changes to monetary policy, has fallen since last week’s Fed rate hike. In addition, the yield curve between 10-year and 2-year bonds is steepening, going from 18.9 basis point before Monday’s Fed rate hike to 44 base points today.

The curve’s inverted portion was noticed in the late March and April. This is a sign that investors should expect a possible recession.

Eric Stein, chief investment officer and co-head at Global Fixed Income said that the curve had been flattened a month before. Morgan Stanley Investment Management.

Stein stated that “we’re beginning to get the conditions in place to stop yields from continuing to rise,” referring to tightening financial conditions as well as lower inflation expectations measured using Treasury Inflation Protected Securities.

Market expectations of future inflation have fallen and breakeven inflation rates indicate that they are falling. On Monday, the 10-year breakeven rate, which is an indicator of future inflation, fell to 2.79%. This further reflects the market’s expectations for inflation. It was 3.14% higher than it was last month.

Fed Chair Jerome Powell said last week policymakers were ready to approve half-percentage-point rate hikes at upcoming policy meetings in June and July.

Jimmy Lee, the chief executive of The Wealth Consulting Group, is optimistic that demand for 10-year bonds will rise if they achieve a 3.5% yield within the next two month.

“The pain might not be over yet, however I sense that we’re moving closer,” he stated.

“Between the two increases, I believe there will be some buying. “I think that fund managers see value like they’ve never seen in a very long time.”

CAPTRUST Vogelzang said that the market does not indicate an imminent upper limit to yields. Further pressure could be added by the Fed’s next-month balance sheet runoff.

He said, “There are too many outcomes that can occur that could really put you in a difficult spot.”