Are bond yields heading lower?

US banks led by Goldman Sachs and JPMorgan have lowered their expectations for US bond yields this year, as hopes of a surge in the US economy subsides.

US Treasury yields have stayed stubbornly subdued, despite the recovery of the US stock market from a bout of turbulence last week, underscoring that bond investors remain far more sceptical of economic growth and inflation than stockpickers. The benchmark 10-year Treasury yield, which moves inversely to price, edged higher to 2.25 per cent on Monday, having fallen 9 basis points from its starting point last week. At the same time, the S&P 500 has been buoyed by announcements of US defence and infrastructure deals over the weekend, after the US administration travelled with senior business leaders to Saudi Arabia. But the shift in mood among investors has done little to assuage concerns about a slip in the timeline for important, promised pro-growth Trump administration policies including fiscal stimulus and tax cuts, with economists now moving to trim their forecasts. “We came into this year guns blazing for higher interest rates but the reality has proven different . . . and we are running out of time,” said William O’Donnell, an interest rates strategist at Citi. We came into this year guns blazing for higher interest rates but the reality has proven different . . . and we are running out of time William O’Donnell, Citi John Hermann, an interest rates strategist at MUFG, who said the bank was waiting before altering its forecast, added: “All the stuff surrounding the Trump circus is potentially a major issue for monetary policy but also fiscal policy. There are all these expectations that a whole bunch of things would get done but increasingly people are becoming more sceptical.” The scepticism has prompted banks including JPMorgan and Goldman Sachs to revise their forecasts for 10-year Treasury yields lower, with both shifting from 3 per cent to 2.75 per cent by the end of the year. The average forecast tracked by Bloomberg stood at 2.76 per cent on Monday, down from a peak of 2.91 per cent reached in April. Steven Major at HSBC has the lowest surveyed forecast in the range for the 10-year at 1.60 per cent in the fourth quarter, while Georgia State University economist Rajeev Dhawan has the highest at 3.65 per cent. “Bond bears have had a difficult start to 2017 as a combination of weakening inflation trends and increasing political risks has kept a lid on yields,” Goldman Sachs analysts wrote in a note to clients. The shift in expectations for long-dated bond yields has yet to affect short-dated interest rate measures, with investors still widely anticipating that the Federal Reserve will raise interest rates when the central bank meets in June. But some analysts say weaker US economic data, especially employee wages and inflation, are dimming the outlook for further rate increases later this year. The Fed has indicated that it plans to tighten monetary policy twice more this year, but interest rate futures indicate that investors see a greater-than-even chance that the central bank is forced to hold fire after a June increase. “We revised our interest rate forecast lower, reflecting a weaker outlook on core inflation, and reduced expectations for fiscal stimulus,” said the JPMorgan analysts.

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