Expectations for better growth and higher inflation drove the recent spike in longer yields and dollar strength, interrupting a widely expected bull run in equities.
But the March 18-25 poll of more than 70 fixed-income strategists pointed to only a marginal rise in major sovereign bond yields over the coming year, driven largely by global central banks’ pledges to keep policy loose for years to come.
The U.S. 10-year Treasury yield hit 1.7540% on March 18, a level not seen since January 2020 – before the pandemic sent yields and stocks crashing. It was forecast to rise about 15 basis points from that high to 1.90% in a year.
That lines up with the findings of a separate Reuters poll of FX strategists who said the dollar’s strength – which has echoed the rise in Treasury yields – was likely to gradually peter out over the coming year.
“This is a temporary push higher in yields because of better growth prospects and higher inflation, but ultimately that inflation hump is likely to prove transitory,” said Elwin de Groot, head of macro strategy at Rabobank.
Still, market prices have factored in interest rate hikes much earlier than major central banks are projecting them, in a conflict that analysts expect will lead to near-term market volatility.
Indeed, 34 of 45 strategists in response to an additional question said another sell-off in bond markets in the next three months was likely, including four who said it was very likely.
When asked to rate current inflation expectations priced-in by global bond markets, 24 of 45 strategists said they were about right. Fifteen respondents said they were too high and six said they were too low.
The break-even rate on U.S. 10-year Treasury inflation protection securities, a gauge of expected annual inflation over the next 10 years, rose last week to the highest since January 2014.
But the U.S. Federal Reserve has pledged to hold interest rates steady even if inflation breaches the central bank’s 2% target this year, a calculated gamble in its new approach emphasizing employment gains.
When asked what Treasury yield level would trigger the Fed to adopt yield-curve control, the consensus range was 2.25-2.50%, about 50-75 basis points above Thursday’s more than one-year high.
“It may not necessarily be a particular level that alarms the Fed, but more the pace of any move,” 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 moving too far too fast, that is what could trigger action from them to control the move in yields.”
Despite the recent rise, sovereign yields remain low by historical standards and the range of forecasts showed higher highs and higher lows, suggesting risks were skewed more to the upside, an idea that 39 of 46 strategists who responded to another question agreed with.
Tracking the U.S. Treasury, yields on benchmark equivalents of other major countries have also risen this year, albeit at a slower pace, and were expected to rise only marginally over the coming year.
“If we are right that yields in the U.S. will continue to rise, that would probably put some upward pressure on long-term yields elsewhere. But we think long-term yields elsewhere will generally continue to rise by less than in the U.S., for several reasons,” noted Thomas Mathews, markets economist at Capital Economics.
“First, we think prospects for economic growth are, for the most part, not as strong outside the United States. Second, in some cases we think central banks will be more keen than the Fed to ensure long-term yields remain low even as their economies recover.”