US Treasury selling this week, which pushed yields to levels not seen since mid-June, suggests the bond market is finally at an inflection point
BENGALURU – Global sovereign yields will be only marginally higher by this time next year, but most bond strategists surveyed by Reuters are confident that is the only way out and the gap between short- and long-term maturities is set to widen.
The latest quarterly election results coincided with an unusually dramatic increase in Treasury yields, a decisive shift from the pandemic emergency policy by the world’s top central banks and rising concerns about inflation.
Their reluctance to forecast anything more than a modest increase in yields may also be a reflection of years spent by the same forecasters who normally predict such a return, only to see relentless demand – led by central banks – from the government. for bond.
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But this week’s sell-off in the US Treasury, which pushed yields to levels not seen since mid-June, suggests the government bond market is finally at an inflection point as investors spar with the Fed and other major central banks. realize the vision.
Arjun Vij, portfolio manager at Jaypee, said, “With growth above trend, inflation is still high enough for the forecast horizon. With such a backdrop, it is generally natural for interest rates to rise in developed markets.” Morgan Asset Management’s $1.15 billion global bond fund.
“The Fed and the markets are pretty close on when the first hike will happen. It is the pace of the hike” where the market has room to close the gap, Vij said.
The results of the survey, conducted on September 24-29, underscored that optimistic economic outlook, with 26 out of 50 analysts, with a 52% majority, saying that the two-year and 10-year Treasury expansion in the coming year. Happened in. more likely outcomes.
While 11 said the spread would remain broadly stable, the remaining 13 projected the gap to narrow.
In the poll, more than 60 bond strategists predicted that the benchmark yield on the US 10-year note would rise to 1.9% in 12 months, about 40 basis points higher than it is now.
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Benchmark yields in Germany, the UK and Japan are expected to rise by about 10 to 20 basis points during the same period.
But there was no clear consensus among analysts as to what the key sovereign yield would be in the short term.
Of those answering a separate question, 24 of 49 said that the coming economic data would have the most impact, while 23 chose forward guidance from central banks and the other two said that developments in COVID-19 and the US Debt limit dispute.
“We think the tapering of Fed asset purchases … is likely to have minimal market impact at this stage,” said Rick Ridder, chief investment officer for Global Fixed Income at BlackRock, on expectations of a $10 billion reduction in US Treasury purchases. and a $5 billion cut from its current $120 billion monthly purchases in mortgage-backed securities.
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“This is partly because the Fed has done a good job of telegraphing when taping is likely to begin, but more importantly, asset purchase cuts are likely to be insignificant, when viewed in the context of certain How big are income markets today and how heavy the demand for income has become.”