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By Hari Kishan and Vivek Mishra
BENGALURU (Reuters) – Another bond market liquidation is likely in the next three months following the recent financial market rout, analysts polled by Reuters said, although they did not predict a meteoric rise in sovereign yields.
Expectations for better growth and higher inflation have led to the recent surge in longer yields and dollar strength, halting a widely expected bullish trend in stocks.
But the March 18-25 poll of more than 70 bond strategists found only a marginal increase in yields on major sovereign bonds over the coming year, in large part thanks to promises from central banks. global policies to keep the policy loose for years to come.
The 10-year U.S. Treasury yield hit 1.7540% on March 18, a level not seen since January 2020 – before the pandemic brought down both yields and stocks. It was expected to rise around 15 basis points from that high to 1.90% in one year.
This dovetails with the findings of a separate Reuters poll of currency strategists which said the strength of the dollar – which echoed the rise in Treasury yields – was likely to gradually run out of steam over the course of the year. coming year.
“This is a temporary surge in yields due to better growth prospects and higher inflation, but ultimately this inflation bump is likely to prove to be transient,” Elwin said. de Groot, head of macroeconomic strategy at Rabobank.
Reuters survey chart on key sovereign bond yield outlook https://fingfx.thomsonreuters.com/gfx/polling/qmyvmryokpr/Bonds%20graphics.PNG
Still, market prices have factored in the interest rate hikes much sooner than major central banks expected, in a conflict that analysts say will lead to short-term market volatility.
Indeed, 34 of 45 strategists in response to an additional question said that another bond market liquidation in the next three months was likely, including four who said it was very likely.
When asked to assess current inflation expectations reflected in global bond markets, 24 out of 45 strategists said they were roughly right. Fifteen respondents said they were too high and six said they were too low.
The breakeven rate on 10-year U.S. Treasury inflation-protection securities, an indicator of expected annual inflation over the next 10 years, increased last week to its highest level since January 2014.
But the US Federal Reserve is committed to keeping interest rates stable even if inflation exceeds the central bank’s 2% target this year, a bet calculated in its new approach emphasizing gains. employment.
Fed Chairman Jerome Powell has so far allayed concerns about soaring US Treasury yields, which have been up around 80 basis points since January.
When asked what level of yield on Treasuries would prompt the Fed to embrace yield curve control, the consensus range was 2.25-2.50%, around 50-75 basis points at the time. above the more than a year high on Thursday.
“It may not necessarily be a particular level that worries the Fed, but rather the pace of any movement,” said James Knightley, chief international economist at ING.
“If yields reflect economic fundamentals then the Fed will be happy, but if they feel things are going too far and too fast, this could trigger action on their part to control the movement of yields. “
Reuters U.S. Treasury poll chart gives outlook https://fingfx.thomsonreuters.com/gfx/polling/dgkvlekwlpb/Bonds%202%20(2).png
Despite the recent rise, sovereign yields remain low by historical standards and the forecast range has shown higher highs and lows, suggesting risks were further biased upward, an idea with which 39 of the 46 strategists who answered another question agreed.
If we follow the US Treasury, the yields on benchmark equivalents of other major countries have also increased this year, albeit at a slower pace, and are expected to rise only slightly in the coming year.
“If we’re correct that yields in the US will continue to rise, that would likely put upward pressure on long-term rates elsewhere. But we believe that long-term rates will generally continue to rise less than in the United States, for several reasons, ”noted Thomas Mathews, market economist at Capital Economics.
“First, we think the outlook for economic growth is for the most part not as strong outside the United States. Second, in some cases we believe central banks will be more eager than the Fed to ensure long-term yields stay low even as their economies recover. “
(Reporting by Hari Kishan and Vivek Mishra; Poll by Indradip Ghosh and Nagamani Lingappa; Editing by Rahul Karunakar and Hugh Lawson)
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