Snapback to higher bond yields? At least five years, say strategists

BENGALURU (Reuters) – A return to significantly higher returns will take longer than previously anticipated, according to a Reuters poll of interest-bearing strategists who lowered their forecasts for large government bond yields to the lowest since the election began 17 years ago.

FILE PHOTO: A trader working on the floor of the New York Stock Exchange (NYSE) in New York, USA, August 7, 2019. REUTERS / Brendan McDermid

Without any resolution in view of the US-China trade war, the current modest global economic expansion cycle hit, prompting major central banks to step into policy easing this year from a sharper view at the turn of the year.

This has not only pushed benchmark indices of sovereign bonds to new low rates this year, but has also resulted in over $ 17 trillion – a record amount – of debt securities pushed into the territory with negative returns.

And according to the September 19-27 poll of over 100 strategists, this trend of subdued dividends is here to stay.

About 70% of strategists who answered an additional question said that the era of low interest rates and government bond yields will last at least another five years, compared to two years predicted just three months ago.

Approximately the same proportion of respondents also said that the risk of high interest rates on sovereign bonds is tilted towards further declines than to rise for the rest of the year.

“It is very difficult to imagine a situation where you get a significant increase in returns. There is clearly a political element at work, and then it is relief from the policies of the central banks, which together anchor the return, says Beata Caranci, chief economist at TD Bank, referring to the US-China trade war.

"Although you can certainly get the prize price on the political side, the economic and international side will continue to weigh."

Bond strategists have not only been flawed for several years in predicting significantly higher interest rates, which have not been realized, were the predictions last year for how large government bond yields would be now.

The US 10-year Treasury is currently providing 1.7%, almost half of the 3.3% strategists had enrolled a year ago for where it would be around now.

U.S .. 10-year government yields have fallen almost 100 basis points this year and are about 35 basis points from testing out a low lifespan, despite the world's largest economy currently in its longest expansion cycle ever.

"There are good odds at the end of next year for us breaking through the perpetual gap in US 10-year government yields, which is about 1.35%," said Guy LeBas, head of fixed income at Janney Montgomery Scott.

While strategists have reduced the 10-year US tax rate to the lowest since the election began 17 years ago, it was about 10 basis points higher from here.

The latest consensus showed that the 10-year US state tax rate is expected to yield 1.8% over a year, just a push above the current consumer inflation rate of 1.7%, suggesting virtually no return on investment locking in a decade.

After the Federal Reserve cut interest rates by 25 basis points in July for the first time in ten years and followed up with a similar move this month, the two-year government rate has fallen above 80 basis points.

The two-year Treasury – sensitive to short-term interest rate expectations – is projected to yield 1.55% over a year from about 1.66% currently.

Although suggesting an expansion of the two- and 10-year portion of the US yield curve, it further reflects a reduction in Fed interest rates rather than a significant strengthening of the curve.

Currently, the US 2-10 yield curve is about 5 basis points away from an inversion, a market event that has preceded almost every American recession since World War II.

When asked about how many more interest rate cuts it would take to significantly manage the yield curve, the top choice for one full percentage point was cut interest rate for fed funds, a move not currently priced by the interest rate futures market or economists.

“Our broad scenario envisages a recession in the United States next year. The idea is: The Fed's approach is insufficient to prevent a recession, says Elwin de Groot, head of macro strategy at Rabobank.

“Although the Fed has already cut interest rates and we expect one more in the short term, it will not be sufficient. So, eventually, the Fed will have to cut rates further back almost to zero. ”

Polling by Sarmista Sen and Richa Rebello; Editing by Ross Finley and William Maclean

Our Standards: The Thomson Reuters Trust Principles.

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