Bonds Yields to Rise 'Substantially Higher' And Beat Artificial Levels Induced by Central Bank Policy, Reaching 2.75%: Deutsche Bank

Bond yields on 10-year U.S. treasuries will rise “substantially higher” than present levels by the end of 2013, according to a Deutsche Bank AG (USA) (NYSE:DB) research note released Thursday.

From a lowly bond yield of 1.63 percent in May, rates have risen to 2.47 percent on Thursday, after remarks Wednesday from Federal Reserve Chairman Ben Bernanke that have shaken the markets. Deutsche Bank economists forecast a year-end high of 2.75 percent.

“Our best estimate is that yields, over time, will go substantially higher from their present level, because they are rising from artificially low, central bank-induced levels,” reads the note, authored by senior economists at the bank.

The researchers make the case that bond yields have stuck closely to the rate of GDP growth in the past three decades, arguing that if economic activity accelerates, yields will rise sharply.

Noting recent disruptions to this pattern, caused by concerns about the U.S. economy, euro zone instability, the fiscal cliff, and federal monetary policy, the report focuses on when the Federal Reserve will tighten, rather than loosen, its monetary policy.

Bond yields on treasuries have fallen from about 7 percent in 1992 to about 2 to 4 percent since 2008, according to data compiled by Deutsche Bank.

Bond yields move inversely to bond prices, so higher yields lead to cheaper bonds. That could lead to massive selloffs within the bond market, as has happened in recent weeks, with investors seeking to exit the bond market before prices plunge too low.