Bond yields to stay put despite soaring global debt – Reuters poll

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By Hari Kishan

BENGALURU (Reuters) – Major sovereign bond yields, guided by central banks, will stay low despite soaring global debt levels and investors looking beyond fixed income securities for better returns, a Reuters poll found.

Following a November stocks rally, investors moved into risky assets, helping sovereign bond yields stay off March life-time lows as a resurgence in cases of the novel coronavirus disrupted economic activity in the United States and elsewhere.

Even though global debt is touching record highs and the majority of borrowing is being used by governments to offset pandemic-related slowdowns, the additional spending was not expected to lead to runaway inflation and higher bond yields.

“We’re not convinced that from here onwards yields will go up much further. We actually think yields will go down somewhat at the longer end of the curve,” said Elwin de Groot, head of macro strategy at Rabobank.

“We’re still in a situation where there’s a lot of uncertainty about the economy. Yes, we will have a vaccine for sure, but we don’t know yet when exactly governments can really start to wind down their support measures.”

Median forecasts of over 60 strategists polled Dec. 1-8 expected the U.S. benchmark 10-year Treasury yield to rise to 1.2% in the next 12-months and Germany’s 10-year Bund to trade around -0.3%.

They were trading around 0.91% and -0.59% on Tuesday.

Even if those 12-month forecasts were realized – and bond yields have for more than a decade undershot predictions – they would be lower than where they started the year.

Among major sovereign bonds, U.S. Treasuries will continue to outperform all other government debt with the widest spread expected to be 150 basis points between the United States’ and Germany’s benchmark bonds.

“Whenever you see yields trading below the policy rate, markets are pricing for greater monetary easing whether it be through asset purchases, loan programmes or even the fact they’re purchasing so many of the government bonds, they’re creating such great demand for them,” said James Orlando, senior economist at TD.

Despite the outperformance of Treasuries against most other sovereign debt, real yields will stay negative as central banks continue to support their economies.

The ECB was forecast to announce measures on Thursday, including topping up its asset purchases by 500 billion euros ($605.50 billion), extending the programme by another six months and changing the terms of its targeted long-term loans. [ECILT/EU]

While only ten of 24 analysts who answered an additional question said the Fed’s next change would be to ease policy, probably tweaking its forward guidance or increasing monthly bond purchases this month, the remaining 14 did not expect tightening to happen soon.

More than 80% of analysts – 22 of 27 – who answered another separate question said the long end of the U.S. Treasury curve, near its steepest level in more than three years, spread between the 2-10’s, was expected to steepen the most over the coming three months.

The remaining five expected the gap between short- and medium-term notes to widen.

“Don’t forget about the Fed because if they believe yields are going too high in the market they obviously will step in and that’s something that may start to play out in the coming months,” added Rabobank’s de Groot.

($1 = 0.8258 euros)

(Reporting by Hari Kishan; Polling by Sujith Pai; editing by Barbara Lewis)