“In the past three weeks the bond market has taken a beating as investors from the U.S. to Europe and Japan have turned their backs on historically low yields and looked toward stocks in a bet that global economies will rebound,” writes Aaron Lucchetti in today’s Wall Street Journal.

“The developing correction in bonds has long been predicted and has erased only about two months of gains for U.S. Treasury investors. But many experts say the nascent bond-market slump is likely to continue and, if bond prices fall hard enough, yields — which move in the opposite direction — may rise enough to threaten an economic recovery by curbing home-mortgage lending and making corporate borrowing costlier.”

Bonds lose some of their value in good times because expanding economies usually are accompanied by inflation and higher interest rates, making other investments more attractive. With market watchers sensing a U.S. recovery in the making, bond investors are undergoing ‘a big sentiment shift,’ says William Hornbarger, fixed-income strategist at A.G. Edwards & Sons.”

“After a long period of Treasury-bond gains capped with a furious rally since 2000, prices have started to slip. Since June 13, the benchmark 10-year Treasury note has fallen 4.2% and its yield has risen to 3.66% from a 45-year-low of 3.1%. In Thursday trading, ahead of the Fourth of July holiday, the 10-year yield rose from 3.54%, pushing the price lower by one point, or $10 per $1,000 face value, to 99 24/32.”

“The decline in major-economy bond markets reflects a growing, yet still tentative belief that the funkish global economy may be on the mend. On the other hand, some traders say major-economy bonds, after years of gains, simply had become too expensive and merely are backing away from unsustainable levels, rather than reflecting any real faith in an economic rebound.”

“Economic news remains uneven, especially in the U.S. Global investors believe the U.S. economy first must regain its footing before ailing economies in Europe and Japan can follow suit; thus its economic health is being closely tracked by investors holding richly priced bonds in Europe and Asia. Last week, the U.S. June jobs report showed unemployment had risen to a nine-year high of 6.4%. This led to a brief rally in bonds, but the move quickly reversed after another report showed signs of recovery in the nation’s services sector.”

“Investors are clearly betting that'”the worst is over’ for the economy, said Brian Edmonds, managing director of U.S. Treasury trading at Banc of America Securities. For bondholders, signs of economic growth are unwelcome because they often lead to inflation, which hurts bond returns. Of course, bad news for bond investors is often good news for the stock market and workers, since economic growth brings corporate profits, capital spending and job growth.”

“The recent decline in bonds has garnered attention since it is occurring across all major developed economies. Some of the heaviest selling in bonds has come from Japan, where investors have moved money from U.S. Treasurys to Japanese stocks, which have enjoyed a rebound.”