BENGALURU (Reuters) – Major sovereign debt yields will feel the pull of gravity well into next year, with the U.S. 10-year benchmark barely rising by the end of 2020, according to a Reuters poll of fixed-income strategists.
Stock markets have soared this year, with most major indices registering double-digit returns on an improving trade outlook and central banks reverting to easy policies.
That has pushed down most sovereign bond yields to below where they were at the start of 2019, completely wrong-footing bond strategists who this time last year forecast the 10-year Treasury note US10YT=RR would rise to 3.30%. It’s now at 1.85%.
Economic growth and inflation expectations in major economies are relatively subdued, although in better shape than thought a few months ago, and so the 85 experts polled by Reuters have tamed their expectations for yields accordingly.
Fixed-income strategists forecast the U.S. 10-year Treasury would yield 1.9% by end-2020, according to their median projection. That is just 5 basis points higher than where it is now, the smallest 12-month predicted increase in 17 years of Reuters polls on major sovereign bond markets.
Yields on Germany’s 10-year bunds and Japanese government bonds are expected to stay negative for the next 12 months. British 10-year gilts are forecast to yield less than 1.0% for the same period. The yield is currently about 0.8%
“It’s our view that the era of low bond yields will continue. When you have economic growth between 1% and 2% and inflation expectations really mute at the same time, there’s not much forcing bond yields higher,” said James Orlando, senior economist at TD.
“That’s just the world we live in right now. Until you see economic growth really starting to accelerate, like consistent 2%-3% growth, bond yields close to 2% is probably what you’ll be looking at in the U.S.”
While fears of a U.S. recession and an escalating trade war with China pushed major sovereign bond yields to multi-year lows in September, improvement in sentiment on both fronts has not translated into analysts predicting major changes in the sovereign bond market.
UK GILTS SEEN MOST AT RISK
A significant minority of analysts – 12 out of 27 – who answered an additional question on which major sovereign bonds were most at risk of a sell-off in 2020 chose UK gilts.
Eight picked U.S. Treasuries and the rest, seven, chose German Bunds.
Among analysts who answered a separate question, 17 of 33 – a near-split – said risks to their yield forecasts were skewed more to the upside.
The rest, 16, said risks were skewed to the downside.
“The combination of slightly better economic data and trade war tensions easing has been the main driver of markets,” said Elwin de Groot, head of macro strategy at Rabobank.
“Ultimately we think this will not be sustained and we will see resumption of declines in yields.”
A much-awaited “Phase One” trade deal between the U.S. and China, following a couple of years of tensions and tit-for-tat tariff hikes, has not yet done much beyond push up the stock market.
Among analysts who answered a question on what was likely to happen to U.S. Treasury yields if there was clear evidence of both countries working towards resolving their trade dispute, 17 of 32 said there would be a significant pick-up.
A remaining 14 said there would be no material impact, and only one said there would be a significant decline.
“In the short-term we are being led around by the nose over these trade headlines … it’ll (a trade deal) certainly help boost yields in the short term but it’s not going to last more than a couple of weeks,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
Polling by Richa Rebello, Manjul Paul and Sumanto Mondal; Editing by Ross Finley and Pravin Char
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