By Hari Kishan
BENGALURU (Reuters) – The era of low sovereign bond yields is not over and any significant pick-up is at least two years away, according to fixed-income strategists in a Reuters poll who are finally shifting away from predictions of higher yields.
A move towards more easing by most major central banks and an escalation in the U.S.-China trade war have pushed yields to new lows.
The U.S. Treasury yield curve has also inverted, a market event previously a precursor to almost all U.S. recessions since the Second World War.
With global growth weakening, inflation not expected to reach or breach central banks’ targets and no clarity on how trade conflicts will play out, major sovereign bond yields were forecast to trade significantly lower than predicted three months ago.
A majority of the more than 70 analysts questioned in the June 20-27 poll also said the risk to those new expectations were skewed more to the downside.
“Economic growth in developed economies will remain around 1 to 2% over the next decade and inflation will be restrained on the upside. That low-growth, low-inflation regime requires low policy rates and low sovereign bond yields,” said James Orlando, senior economist at TD Securities.
Among analysts who answered a separate question on how long the current low-yield era will last, 29 of 39 said over two years, including four respondents who said over 10 years and one who said “forever”.
The remaining 10 analysts said less than two years.
That view is underscored by expectations the U.S. Federal Reserve, on a steady tightening mode until late last year, will cut interest rates in coming months. [ECILT/US]
Over 60% of analysts who answered an additional question forecast a Fed rate cut in July, most likely by 25 basis points.
“It is very rare that the beginning of the Fed cutting cycle is this low in yields. That is just not how financial markets operate,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
“Moreover… all these rate cut fears and the rally at the long end of the U.S. curve is on the back of okay economic data. So I doubt if this is the low. I think 12 to 18 months from now, yields will be slightly comparable or lower.”
Market strategists have been wrongfooted by a significant margin over the past several years in predicting higher bond yields, which have not materialized for almost a decade.
They have shifted away from that conventional view and are now forecasting subdued yields over the next 12 months.
While there is hope of a trade war truce between the U.S. and China at this week’s G20 meeting, the ongoing conflict is being blamed for slowing international growth and adding pressure on central banks to adopt looser policies.
After dropping below 2.0% on Tuesday to levels last seen in November 2016, U.S. 10-year Treasury note yields rose slightly to a touch above 2.0%.
While they are now forecast to rise to 2.20% in a year, that is the lowest since a survey almost three years ago and far lower than the 2.8% predicted in the March poll.
As major central banks are expected to loosen policy to fight economic slowdown, more investors will likely flock into the safety of liquid and low-risk government debt, keeping yields depressed and returns elusive.
German 10-year bond yields fell to a lifetime low of -0.336% this week and were at -0.303% on Thursday. While they are forecast to climb to about 0.10% in a year, that was the lowest prediction since Reuters started polling on it over 17 years ago.
“What’s going on in Europe … is driven by a central bank that has promised to keep overnight rates at zero or below forever,” said Janney Montgomery Scott’s LeBas.
“Although the prospects of deeply negative interest rates is somewhat befuddling, it does seem to be the base case in Europe at least.”
(Polling by Sarmista Sen and Hari Kishan; Editing by Jonathan Cable and John Stonestreet)