There has been a dramatic shift in U.S. Treasury markets over the past 10 months, but a Japan-like outcome is highly unlikely, i.e. the embedded assumption that low yields are now a permanent feature of investment strategy is by no means guaranteed.
While the possibility that U.S. 10-year Treasury yields could go to 0% in the event of a recession cannot be ruled out, these bonds are now one and a half and two standard deviations overbought and overvalued based on the MRB Cyclical Momentum Indicator and the MRB U.S. 10-Year Treasury Valuation Indicator, respectively. Such levels have been typically followed by significant rises in yields. Ultimately, bonds yields will trend with economic data, but at current prices one of the implications is that any signs that a recession can be kept at bay over the next 6-12 months will pose a meaningful risk and likely trigger a sizeable bounce in yields, which skews the risk-reward unfavorably over the life of a 10-year security. Investors should tread very carefully in the Treasury market.