# Sovereign bond yields not yet reached a summit – Reuters poll
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-09-20
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Sovereign Debt Turmoil Expected to Keep Yields High
Meta Description: Expect elevated bond yields well into next year, with risks skewed towards higher rates. Major central banks ditch pandemic-era policies in pursuit of elusive
URL: https://financedigest.com/sovereign-bond-yields-not-yet-reached-a-summit-reuters-pollhtml

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By Hari Kishan

BENGALURU (Reuters) – The latest turmoil in major sovereign debt markets is far from over as bond strategists in a Reuters poll expected yields to stay elevated well into next year, with risks firmly skewed towards their moving higher than currently predicted.

More than a decade of rock-bottom sovereign bond yields came to an abrupt end earlier this year as major central banks, which kept them artificially subdued, dumped pandemic-era policies in pursuit of price stability which so far has remained elusive.

With inflation now running multiple times higher than major central bank targets, [bond yields](https://www.financedigest.com/global-equities-gain-as-rising-bond-yields-pressure-gold.html "Global equities gain, as rising bond yields pressure gold"), along with policy rates, are unlikely to drop significantly in the short- to medium-term.

The Sept. 12-19 [Reuters poll](https://www.financedigest.com/germany-home-prices-to-sink-nearly-6-this-year-reuters-poll.html "Germany home prices to sink nearly 6% this year – Reuters Poll") of over 40 fixed income strategists and economists showed major sovereign bond yields trading near current levels in one, three, six and 12 months from now.

However, given the backdrop of stubbornly high inflation, the bias was clearly for [yields to move higher](https://www.financedigest.com/wall-street-stocks-power-higher-as-treasury-yields-and-dollar-ease.html "Wall Street stocks power higher as Treasury yields and dollar ease"). An overwhelming 86% of strategists, 38 of 44, said that was the risk to their forecasts.

The U.S. Federal Reserve, which sets the rate for the cost of capital globally by default, was forecast to go for a third consecutive jumbo 75 basis point hike on Wednesday, with a one in five chance of a [bigger 100 basis point hike](https://www.financedigest.com/ecb-weighs-bigger-rate-hike-with-safety-net-for-indebted-countries.html "ECB weighs bigger rate hike with safety net for indebted countries"). \[ECILT/US\]

A hawkish [Fed keeps](https://www.financedigest.com/dollar-buoyant-as-robust-u-s-data-keep-fed-hawks-in-control.html "Dollar buoyant as robust U.S. data keep Fed hawks in control") our core rates strategy unchanged: stay underweight front-end and lean, long back-end with increased risks of a hard landing,” noted Mark Cabana, head of U.S. rates [strategy at Bank](https://www.financedigest.com/attacking-banking-and-fintech-fraud-head-on-through-ai-infused-strategies.html "Attacking Banking and Fintech Fraud Head-On Through AI-Infused Strategies ") of America Securities.

While bond yields were forecast to remain high, much of the rise was expected to come from shorter duration securities, which are the most sensitive to central bank [rate hikes](https://www.financedigest.com/hopes-of-slowdown-in-rate-hikes-bolster-shares-ahead-of-u-s-gdp.html "Hopes of slowdown in rate hikes bolster shares ahead of U.S. GDP"). That is [set to continue given the Fed is not yet](https://www.financedigest.com/g7-finance-chiefs-agree-on-russian-oil-price-cap-but-level-not-yet-set.html "G7 finance chiefs agree on Russian oil price cap but level not yet set") close to being done.

If clients are looking to take an outright duration long, we still recommend waiting until the [Fed delivers the last hike](https://www.financedigest.com/stocks-euro-gain-amid-divergent-fed-ecb-rate-hike-outlooks.html "Stocks, euro gain amid divergent Fed, ECB rate hike outlooks"). For now, the curve is still biased flatter with a [hawkish Fed,”](https://www.financedigest.com/stocks-sag-as-hawkish-fed-cools-china-rally-awaits-us-jobs-data.html "Stocks sag as hawkish Fed cools China rally; awaits US jobs data") Cabana wrote.

There is no real consensus yet – but plenty of [worry – about how far central banks need to go and how active they will be offloading their bloated balance sheets while raising rates](https://www.financedigest.com/uk-stocks-slip-as-rate-hike-worries-grip-investors.html "UK stocks slip as rate hike worries grip investors").

Yields on U.S, [German and UK two-year notes were trading at levels not seen for at least a decade as markets and economists expect](https://www.financedigest.com/german-economy-expected-to-skirt-recession-economy-ministry-report.html "German economy expected to skirt recession – economy ministry report") the Fed, the European Central Bank and the Bank of England to continue raising interest rates.

In the near-term the risks are to [higher yields](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") than we are currently forecasting,” said James Knightley, chief international economist at ING.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/09/Reuters-Poll-Major-sovereign-bond-market-outlook.jpg)

Poll medians showed U.S. [Treasury two-year notes were expected to yield](https://www.financedigest.com/wall-street-drops-treasury-yields-gyrate-on-fed-chairman-powells-remarks.html "Wall Street drops, Treasury yields gyrate on Fed Chairman Powell’s remarks") in a 3.6%-3.7% range over the next six months and then dip slightly to 3.3% in a year.

The story was similar on the other side of the Atlantic, with the [German two-year note forecast to yield](https://www.financedigest.com/german-yields-steady-spreads-tighten-after-recent-repricing.html "German yields steady, spreads tighten after recent repricing") 1.51% and 1.75% in the next three to six months respectively. UK two-year [gilts were forecast to yield](https://www.financedigest.com/euro-zone-bond-yields-fall-as-ecb-policymaker-flags-recession-risk-gilts-eyed.html "Euro zone bond yields fall as ECB policymaker flags recession risk, gilts eyed") around 3.0% over the next six months.

A sharp rise in short-term borrowing costs is likely to restrict economic activity and so also prevent [yields](https://www.financedigest.com/stocks-fall-treasury-yields-rise-upon-final-2022-trading-day.html "Stocks fall, Treasury yields rise upon final 2022 trading day") on longer-term maturities from rising too much.

Benchmark 10-year [bond yields](https://www.financedigest.com/wall-st-stocks-fall-bond-yields-rise-as-china-drops-quarantine-rule.html "Wall St stocks fall, bond yields rise as China drops quarantine rule") for the U.S. and the UK were [expected to dip below two-year notes](https://www.financedigest.com/the-immunooncology-market-is-expected-to-grow-on-a-persistent-note-in-the-future.html "The Immunooncology Market is expected to grow on a persistent note in the future") in the next 12 months, inverting the yield curve, which in the past has forecast a recession was coming in the next 12-24 months.

![](https://www.globalbankingandfinance.com/wp-content/uploads/2022/09/Reuters-poll-U.S.-treasury-yield-outlook.jpg)

In the [euro zone](https://www.financedigest.com/euro-zone-recovery-gathers-pace-allays-fears-of-recession-pmi.html "Euro zone recovery gathers pace, allays fears of recession-PMI"), the yield curve was expected to be at its flattest since the beginning of the global financial crisis back in 2007.

The recent significant rise in [rates has been global in nature and has been a function of central bank](https://www.financedigest.com/european-central-bank-to-raise-deposit-rate-to-3-25-by-mid-year-reuters-poll.html "European Central Bank to raise deposit rate to 3.25% by mid-year: Reuters poll") hiking expectations as well as rising term premiums,” noted Priya Misra, head of global rates strategy at TD Securities.

We would argue that a faster pace of [hikes by central banks and a higher terminal rate](https://www.financedigest.com/stocks-bonds-extend-rally-on-hopes-rate-hikes-ease.html "Stocks, bonds extend rally on hopes rate hikes ease") have been more dominant as evidenced by the flattening of the global sovereign curves.

(For other stories on major government [bond yields and money market](https://www.financedigest.com/stocks-up-bond-yields-fall-as-markets-mull-a-fed-policy-pause.html "Stocks up, bond yields fall as markets mull a Fed policy pause") rates:)

(Reporting by Hari Kishan; Additional reporting by Indradip Ghosh; Polling by Prerana Bhat and Swathi Nair; Editing by Ross Finley and Chizu Nomiyama)


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