Bond Bulls Bide Time

Jim Sarni, a managing principal with Los Angeles-based Payden & Rygel, said that the bond market "got ahead of itself" in the second quarter and was anticipating much more growth and inflation than is likely to materialize this year.

Although interest rates might not sink to levels seen earlier this year, Sarni said rates could come down slightly or level off, as the economic data continues to undershoot expectations. "We don't think the bull market [in bonds] is over," he said. (Sarni is part of a team that manages $52 billion in fixed income assets.)

Of course, strategists say it's hard to predict what will happen, particularly because the Fed is no longer fighting against inflation but is instead trying to maintain price stability. In its last policy statement, the Fed said the risks of rising inflation were "roughly equal" with the risks of falling inflation.

"It's a different era than where we've been the past 25 years and I think that's why there's more uncertainty about the direction than there has been in a while," said John Derrick, who manages $600 million in fixed-income products at U.S. Global Investors.

Derrick thinks it's too early in the interest rate cycle to look for lower bond yields but he isn't expecting an explosive move upward either, saying rates should reach 5% by year-end.

Still, Hoisington Investment's Hunt doubts that yields will move higher this year, saying consumer spending probably will fall off over the next six months without tax cuts to support it. He is looking for one more rate hike at most this year while futures markets continue to price in another 100 basis points of tightening.

"Our feeling here is bond yields are going to drop significantly over the second half of the year," he said. "At the end of the year, [yields] are going to be well below where [they] started the year."

The yield on the 10-year Treasury note began the year at 4.25%.