'Natural' for global bond yields to rise from here, say strategists

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BENGALURU – Global sovereign yields will have only drifted modestly higher by this time next year, but most bond strategists polled by Reuters appear convinced the only way is up and the gap between short and long-term maturities is set to widen.

The latest quarterly poll results coincide with an unusually dramatic rise in Treasury yields following what most say is a decisive shift away from pandemic emergency policy by the world's top central banks and rising concerns about inflation.

Their reluctance to forecast anything more than modest rises in yields may also be a reflection of the years spent by these same forecasters predicting such a return to normal only to be flattened by relentless demand – led by central banks – for government bonds.

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But the sell-off in U.S. Treasuries this week that pushed yields up to levels not seen since mid-June suggests the government bond market is finally at an inflection point as investors realign their outlook with the Fed and other major central banks.

"Growth is above trend, inflation is high enough as of now and for the forecast horizon. With this kind of backdrop, it is but natural for interest rates generally in the developed markets to move higher," said Arjun Vij, portfolio manager of J.P. Morgan Asset Management's $1.15 billion Global Bond Fund.

Global sovereign yields will have only drifted modestly higher by this time next year, but most bond strategists polled by Reuters appear convinced the only way is up and the gap between short and long-term maturities is set to widen. (Graeme Sloan/S

"The Fed and markets are pretty close on when the first hike will be. It's the pace of hikes" where there is room for markets to close the gap, Vij said.

The results of the poll, conducted Sept. 24-29, underscored that optimistic economic outlook, with 26 of 50 analysts, a 52% majority, saying a widening in U.S. two-year and 10-year Treasury spreads over the coming year was the more likely outcome.

While 11 said spreads would stay roughly steady, the remaining 13 forecast the gap to narrow.

In the poll, over 60 bond strategists predicted the benchmark yield on the U.S. 10-year note would rise to 1.9% in 12 months, about 40 basis points higher than where it is now.

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Benchmark yields in Germany , Britain and Japan were forecast to move up around 10 to 20 basis points during the same period.

But there was no clear consensus among analysts on what would drive major sovereign yields in the short run.

Among those who answered a separate question, 24 of 49 said incoming economic data would have the most impact, while 23 chose forward guidance from central banks and the other two said COVID-19 developments and wrangling over the U.S. debt ceiling.

"We think the tapering of Fed asset purchases … is likely to have minimal market impact at this stage," said Rick Rieder, chief investment officer of global fixed income at BlackRock, referring to expectations for a $10 billion reduction in U.S. Treasury purchases and $5 billion cut in mortgage-backed securities from its current $120 billion monthly buys.

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"This is partly because the Fed has done a decent job of telegraphing when tapering is likely to begin, but more importantly it's because the asset purchase reductions are likely to be trivial when seen in the context of how large the fixed income markets are today and how overwhelming the demand for income has become."

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