Sovereign bond yields have yet to peak.

By Hari Kishan

BENGALURU (Reuters) – The recent turmoil in major debt markets is far from over, with bond strategists expecting yields to remain buoyant next year in a Reuters poll, with risks moving higher than currently expected.

More than a decade of rock-bottom sovereign bond yields came to an abrupt end earlier this year as major central banks ditched pandemic-era policies in pursuit of hitherto elusive price stability, which had artificially deflated them.

With inflation now running several times higher than key central bank targets, bond yields, along with policy rates, are likely to fall sharply in the short to medium term.

A Reuters poll of more than 40 fixed-income strategists and economists from September 12-19 showed major sovereign bond yields trading at current levels in one, three, six and 12 months.

However, against a backdrop of stubbornly high inflation, the bias was clearly to raise output. A whopping 86% of strategists, 38 out of 44, said this was a risk to their valuation.

The US Federal Reserve, which defaults on capital spending globally, forecast a third consecutive jumbo 75 basis point hike on Wednesday, giving it a one in five chance of a big 100 basis point exit. [ECILT/US]

Mark Cabana, head of U.S. rate strategy at Bank of America, said: “The hawkish Fed is keeping our core rates strategy unchanged: underweight front-end and lean, long back-end with heavy landing risks.” .

While bond yields are forecast to be higher, most of the increase is expected to come from short-term securities, which are the most vulnerable to central bank rate hikes. This is set to continue as the federation is yet to commit.

“If it’s going to take longer, we still recommend that clients wait until the Fed makes its final hike. For now, the curve is still biased toward the hawkish Fed,” Cabana wrote.

There’s still no real consensus — but plenty of anxiety — about how far central banks should go and how far they should raise rates and bring down the spread of balance sheets.

Two-year notes in the US, Germany and the UK were trading at levels not seen for at least a decade as markets and economists expected the Fed, the European Central Bank and the Bank of England to continue raising interest rates.

James Knightley, chief global economist at ING, said: “The concern in the near term is that we will have higher yields than we currently think.”

Graphic: Reuters Poll- Major Sovereign Bond Market Outlook https://fingfx.thomsonreuters.com/gfx/polling/gdvzyxldopw/Reuters%20Poll-%20Major%20sovereign%20bond%20market%20outlook.PNG

Pollsters show two-year U.S. Treasury notes are expected to yield 3.6%-3.7% over the next six months and then ease back to 3.3% for the year.

The story was similar across the Atlantic, with Germany’s two-year note forecast to yield 1.51% and 1.75% over the next three and six months, respectively. UK two-year gilts were forecast to yield around 3.0% over the next six months.

A sharp increase in short-term borrowing costs can limit economic activity and prevent yields at longer maturities from overinflating.

Benchmark 10-year bond yields are expected to fall below two-year notes over the next 12 months, inverting the yield curve, which previously predicted a recession in the next 12-24 months.

Graphic: Reuters Poll US Treasury Yield Outlook https://fingfx.thomsonreuters.com/gfx/polling/znpnewakavl/Reuters%20poll-US%20treasury%20yield%20outlook.PNG

In the Eurozone, since the beginning of the global financial crisis in The yield curve is expected to be steeper from 2007 onwards.

“The recent significant rate hike is global in nature and is a function of expectations of central bank hikes as well as wage hikes,” said Priya Misra, head of global rate strategy at TD Securities.

“We argue that central banks’ faster pace of hikes and higher terminal speeds have become more dominant.

(For other stories on major government bond yields and money market prices:)