That supply-demand imbalances may change next year as the central banks retreat from their quantitative easing, which would lead to higher bond yields, according to JPMorgan Chase & Co. The global demand for bonds is likely to drop by $3.1 trillion next year, more than the expected $2.3 trillion decline in net supply, according to JPMorgan’s strategist Nikolaos Panigirtzoglou.
But any increase in yields will likely be moderate. Goldman Sachs Group Inc. strategists led by Praveen Korapaty predict that 10-year real yields will only rise to minus 0.85% next year, leaving them in a negative territory for a record third year in a row.
What’s underpinned the negative yields is the fact that investors have persistently priced in one of the least aggressive rate-hiking campaigns in history.
Markets are currently predicting just five 25 basis-point rate increases that would end with the Fed’s benchmark at about 1.5% by the end of 2024. By comparison, the central bank lifted rates by a total of 2.25 percentage points and 4.25 percentage points in the last two tightening cycles.
The Fed’s own dot-plot forecast in September anticipates that rates will rise to 1.75% by 2024 and that it won’t reach a neutral level until 2.5%. Fed officials may hit an even higher rate projection when they release fresh forecasts for the economy and the dot-plot at the policy meeting Wednesday.
Margie Patel, senior portfolio manager at Allspring Global Investments, doubts that the Fed will raise rates all the way to the neutral level.
“There’s not impetus for the Fed to slam on the breaks -- and they know when they do so they cause recessions,” said Patel, whose firm manages $587 billion in assets. “They have repressed interest rates, they are going to keep repressing interest rates.”
The combination of low yields and high inflation this year has taken a toll on bond buyers, forcing them to look elsewhere for higher returns. Over the past decade, Bloomberg’s U.S. Treasury index gained 2.3% a year, barely beating consumer price increases even during periods of relatively tame inflation. Meanwhile, even as the government debt swelled since the pandemic, its interest expense declined to 2.5% of the gross domestic product in the fiscal year ended in September from 2.7% in 2019.
“We haven’t been excited about negative real rates,” said Christian Hoffmann, portfolio manager at Thornburg Investment Management. “This has become less of a free market. We are not taking a lot duration risks at all.”
This article was provided by Bloomberg News.