March 25, 2020 / 12:31 AM / 13 days ago

Lower sovereign yields to stay as global economy in recession: Reuters poll

BENGALURU (Reuters) - Major government bond yields will trade near their current lows in the coming year, foreshadowing a deep recession driven by the coronavirus pandemic, according to fixed-income analysts in a Reuters poll who said the bias was for them to drift lower.

As global share markets crashed, traders and investors fled headlong to the safety of bonds to hedge the economic trauma from the coronavirus, pushing sovereign bond yields to record lows earlier this month.

That comes despite most central banks stepping up efforts by cutting rates and announcing unprecedented easing in emergency moves.

But since then, bond markets have also been highly erratic, as trading books were damaged from orders in markets falling to a trickle, driven by a lack of liquidity.

Still, a majority of analysts, after expecting higher yields for years, have thrown in the towel and said the most likely path over the next three months was to stay around current levels and be range bound, or fall further.

That is driven by predictions the global economy was already in a recession, according to a majority of analysts, similar to economists’ expectations in a separate Reuters poll published on Friday. [ECILT/WRAP]

“The recent sell-off in U.S. Treasuries and (German) Bunds is more about a generalised rush for cash than about supply fears. For now, collapsing growth, low inflation and mega-easy monetary policy warrant low yields,” noted analysts at Societe Generale.

“Volatility and liquidity were the key drivers of Treasuries, with the monetary bazooka and expectations of a large fiscal package doing little to assuage fears. We expect Treasury yields to decline as the Fed and global central banks engage in QE and other extraordinary measures to provide stimulus.”

Even the U.S. bond market, the most liquid in the world, ceased to function earlier this month, as traders sold off any asset in their possession to make up for losses elsewhere and to stock up on cash, particularly dollars.

While the Federal Reserve has announced enormous stimulus measures, financial markets have not budged.

The U.S. 10-year Treasury yield fell to 0.3% on March 9, a record low.

A separate Reuters poll of economists showed the longest U.S. expansion on record has come to an end and there was a 80% chance of a U.S. recession this year. [ECILT/US]

“We don’t know how deep this is...the Fed is just pulling out all the stops throwing everything in, including the kitchen sink, and we’re going to see some efforts from Washington. It is not going to prevent things from getting worse; at best it may sort of lessen the damage. But we still have to go through it in the near-term,” said Scott Brown, chief economist at Raymond James.

“There’s a lot of second and third round effects, when people start losing their jobs or they are not spending...and this really gets to the unwieldy problem with the forecast.”

The U.S. two-year, 10-year yield curve, which is closely watched as a recession indicator and flattened as far as 2 basis points earlier this month, was expected to steepen during the coming year to more than 50 basis points, which is just about double the size of a typical central bank rate change.

That part of the yield curve was briefly inverted in late August and early September.

While U.S. 10-year Treasury yields have risen by about 50 basis points from their record lows, they were still one full percentage point lower than where they started the year.

The consensus now is for the 10-year yield to rise 45 basis points to 1.25% in a year from around 0.8% on Tuesday. That median expectation was the lowest seen in Reuters poll records going as far back as 2002.

Just three months ago yields were expected to be around 2.0% in 12 months’ time and at nearly 3.0% a year before that - which was not predicted by any analyst in the latest poll for the coming year.

“I’m not forecasting that the 10 year yield is going to get back to 3%, because we’re not forecasting growth even when we’re past this virus time period to rebound much more than 2% in the United States and we’re not expecting inflation to take off either,” said James Orlando, senior economist at TD Economics.

Yields on 10-year German Bunds, UK Gilts and Japanese government bonds (JGBs) were forecast to be around 10 basis points up or down from their current levels, suggesting any rise or fall for these securities would be limited.

Yields for benchmark U.S., Germany and UK bonds could drop to as low as 0.50%, -0.70% and 0.30%, respectively, in the next three months, according to the median view.

Polling by Manjul Paul, Sumanto Mondal and Khushboo Mittal; Editing by Ross Finley and Chizu Nomiyama

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