© Stocksak. FILE PHOTO – A specialist trader works at the New York Stock Exchange, U.S.A., October 17, 2022. REUTERS/Brendan McDermid/File Photo
By Hari Kishan
BENGALURU (Stocksak), – Turmoil on global sovereign bond markets will continue for six months to one year, as central banks keep raising interest rates to lower inflation, according to a Stocksak poll.
It has been more than a whole year since inflation began to be a concern, and it has been just six months since the U.S. Federal Reserve raised its interest rate from near zero. There is no sign that price growth is becoming less of an issue.
Since the Fed moved, bond markets have experienced high levels of volatility, deep sell-offs and jolted many bond investors from their complacency.
The ICE (NYSE) BofAML U.S. The Bond Market Option Volatility Estimate Index began rising in late last year and hit its highest point since March 2020. This trend of great uncertainty looks set to continue.
Over 65% of bond strategists, 14 out of 21, answered an additional question in a Stocksak Oct. 19, 19-21 poll, predicting that the current turmoil on sovereign debt markets would persist for at most six to twelve more months. One person predicted it would last one to two year. The remaining seven answered less than six month.
“We’re likely in for at least another 12 months of significant volatility on bond markets …(and (it could be more),” said Elwin De Groot, Rabobank’s head of macro strategy.
“Volatility will not go away soon. Even though central banks are moving closer to this pivot point, so-to-speak, there may be other sources of uncertainty that keep volatility high in markets. High volatility means higher risk premiums.
The yields could fall over the next 12 month, with most major government bonds yields rising more than 200 basis points from the beginning of the year and most central bank well past the half-way mark of their expected tightening cycles.
The benchmark was expected drop from its 14-year peak of 4.27% on Friday to 3.89% by the year’s end. The benchmark was then expected to fall further to 3.85% or 3.58% over the next six- and twelve months, respectively.
These median forecasts were however higher than September’s poll. This suggests that yields still face upside risks.
This is largely due to the U.S. Fed’s unrelenting effort at tamping down inflation, which is currently running multiple-times higher than its 2.0% mandate.
“In the current paradigm,” Benjamin Jeffery, rate strategist at BMO Capital Markets, stated that inflation is too high for them to be hesitant in being very,very hawkish.
Despite the Fed’s marked difference in hawkishness to its closest peers, the European Central Bank or the Bank of England (BoE), benchmark yields on German bunds have risen in tandem and U.S. Treasuries.
German bunds hit a new 11 year high of 2.49% Friday as rising interest rates and worries weighed on debt markets. The ECB expects to increase its rate by 75 basis points this week.
The poll predicted that bund yields would fall slightly from their current levels to 2.10% at the end of 2022, and then rise slightly to remain around 2.20% for six months. They were then expected to drop to 2.10% within a year.
The UK gilt market was severely battered when the government announced a wave unfunded tax cuts on September 23, inciting fears of fiscal imprudence and sending benchmark borrowing rate to a 20 year high.
Investor confidence has been somewhat restored, with most of the measures now reversed. The prime minister was fired and the finance minister fired.
The gilt yields are expected to rise from 3.90% now and trade above 4.0% in the next six months. They are expected to fall to 3.80% within a year.