“We expect the global thirst for yield to remain intact during 2013. However, investors were treated to outstanding bond returns in 2012 that are unlikely to be repeated in 2013,” said Tom Fahey, associate director of macro strategies for Loomis Sayles, in an AdvisorOne report. The math of bond returns “just gets harder and harder” as yields keep steadily declining, Fahey added.

Yields on 10-year Treasury notes last week bumped above 1.9% to their highest level in about eight months.

“The sharp move has come as a shock to many market watchers, who were predicting a banner start to 2013, with wrangling in Washington and worries over the economy likely to keep investors heading to the safety of U.S. government debt. In addition, the Federal Reserve is buying $45 billion of Treasurys each month, they reasoned,” The Wall Street Journal reports.

However, the fiscal cliff agreement has put investors into a more “risk-on” mindset and curbed demand for safe havens such as Treasuries. Investors in both bond and stock ETFs should keep a close eye on Treasury yields in 2013.

“Once again, bond analysts and investors expect Treasury yields, the benchmarks for all U.S. debt, to rise in 2013 as the economy improves and money moves to higher-yielding options,” MarketWatch reports. “That makes sense, but it’s worth remembering: they’ve overshot for the last decade.”

iShares Barclays 20+ Year Treasury Bond

Full disclosure: Tom Lydon’s clients own TLT and SPY.