Major sovereign bond yields to rise amid heightened volatility

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BENGALURU, Dec 10 (Reuters) - The recent spike in bond market volatility will continue or rise further over the next three months, according to a Reuters poll of fixed income experts who mostly thought a correction in yields was unlikely during the same period.

Uncertainty over the spread of the Omicron coronavirus variant and hawkish remarks from U.S. Federal Reserve Chair Jerome Powell last week threw financial markets into disarray, pushing volatility measures to levels not seen in a year.

With economies recovering from the pandemic and major central banks planning to tighten policy to control inflationary pressures that are proving to be more persistent than expected, major sovereign bond yields are forecast to rise.

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All but two of 18 respondents who answered an additional question said bond market volatility over the next three months would either rise (5) or remain elevated (11).

"The closer we get to herd immunity across the board and the more certainty we have about new variants not causing lockdowns – these will help reduce volatility," said Arjun Vij, who manages J.P. Morgan Asset Management's $1.15 billion Global Bond Fund.

"With uncertainty around both of these issues still lingering, there's limited reason to think that volatility will be necessarily lower in the next three to six months."

Reuters poll graphic on the major sovereign bond yields outlook

Higher highs and higher lows for U.S. sovereign yield forecasts in the poll taken Dec. 6-9 showed that analysts were expecting the Fed to quicken its shift toward policy tightening.

A separate Reuters poll on Thursday showed most economists forecasting the central bank will end its $120 billion of monthly bond purchases as early as next quarter compared with previous expectations for the middle of next year.

The quarterly survey of over 60 fixed-income experts showed the yield on the benchmark U.S. 10-year note rising to 1.75%, 1.90% and 2.08% in the next three, six and 12 months, respectively. It was trading around 1.50% on Thursday.

If those predictions are realized, it would be the first time since August 2019 the U.S. 10-year note would have moved past the 2.0% yield mark.

But some analysts expect yields to stay around current levels or even drop slightly.

"Central banks that are hiking rates now or are about to tighten policy run the risk of making a policy error and those central banks that are staying put are probably in a slightly better position," said Elwin de Groot, head of macro strategy at Rabobank.

"We do expect the Fed to hike rates next year. We have one rate hike penciled in but we're not convinced that this is going to be a significant tightening cycle by the Fed."

Most respondents also appear to be ruling out a major sell-off in government bond yields in the immediate future.

Over 50%, eight of 15, who answered another additional question said a significant correction in sovereign global bond yields was unlikely.

A closely-watched part of the U.S. Treasury yield curve, the gap between yields on two- and 10-year Treasury notes , was expected to widen from around 80 basis points to nearly 100 basis points over the next 12 months.

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Reporting by Hari Kishan; Polling by Mumal Rathore and Susobhan Sarkar Editing by Ross Finley and Mark Potter

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