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Posted by Colin Barr

The Treasury rally is over, Goldman Sachs says.

The investment bank’s chief interest rate strategist says the yield on the 10-year Treasury note is more or less done falling, the Wall Street Journal reports. Francesco Garzarelli tells the WSJ that stocks offer “much better return opportunity than bonds going forward.”

Is the bond bull market over?

He predicts the yield will stick around 2.5% for the balance of 2010 before rising as high as 3% next year.

The comment comes at the end of a six-month plunge in bond yields, and a corresponding rise in bond prices, that was anticipated by few forecasters on Wall Street. Goldman Sachs was among the most bullish firms on the outlook for bonds this spring, yet even Goldman underestimated how far bond yields would fall.

In April, the yield on the 10-year Treasury was briefly 4%. At the time, Goldman’s forecast of 3.25% on the 10-year stood out among competitors who were predicting that yields would surge along with government bond issuance. But as it turns out the yield plunge ended up being twice as deep as even Goldman predicted.

Monday’s remarks come as Fed officials weigh the pros and cons of another round of asset purchases in the name of further suppressing interest rates and keeping a weak recovery moving forward.

Bill Dudley, the president of the Federal Reserve Bank of New York, said Friday that it’s “likely” the central bank will provide more stimulus, a program widely known as QE2, for a second round of quantitative easing. Brian Sack, who runs the New York Fed’s market desk, said Monday that the Fed may have to adjust to a new world of zero interest rates by offering more commentary on the size of its balance sheet.

Some forecasters such as David Rosenberg of Gluskin Sheff have been saying the yield on the 10-year note could fall below 2%, and another round of QE would seem likely to push things in that direction.

But Garzarelli says the next Fed easing plan is priced into the market – which means that if the central bank does embark on another round of easing it might not be able to get rates any lower. Talk about money for nothing.