Bond Bulls Bide Time

In addition, a number of brokers, including UBS, Lehman Brothers and J.P. Morgan, have lowered forecasts for second-quarter GDP growth recently.

Last week, Pacific Investment Management bond guru Bill Gross changed his pessimistic stance on bonds and bought $35 billion in Treasury and mortgage-related securities, noting that concerns about higher inflation and interest rates already have been factored into prices and that the economy seems to be slowing down, according to The Wall Street Journal.

Still, overall sentiment in the bond market remains more bearish than bullish, with many hedge fund managers and traders expecting long-term interest rates to move higher by year-end. Only 12% of clients polled by J.P. Morgan expect bond yields to fall this year while 40% are looking for yields to rise. About 48% are neutral.

David Rosenberg, chief economist at Merrill Lynch, said the 23-year bull market in bonds has survived no fewer than five Fed tightening cycles and most likely will survive this one.

"Mini-bear phases have come and gone," he said, noting that yields have seen lower highs and lower lows consistently "since the Volker-induced and Greenspan-nurtured secular bull market began in September 1981."

For this secular bull market to be broken, he said, the 10-year Treasury yield would have to break above the prior high of 5.44% posted in April 2002.

Peter McTeague, co-head of interest rate strategy at RBS Greenwich Capital Markets, agrees. Even though yields are well above their lowest levels of the year, he believes the bull market is alive and well, at least for now.

"I think that we're very late in the economic cycle ... and that over the course of this year and next year we're going to find that growth did peak out at the beginning of this year," he said, adding that he expects the 10-year Treasury yield to be sitting at 4.50% by year-end.