German government bonds are set to outperform their US counterparts, as they continue to benefit from a weaker economy and lower interest rates in the euro zone, according to a Reuters poll of 35 strategists. Yields, which move inversely to prices, were expected to rise faster in the United States than Germany over the coming 12 months, because of more rate hikes from the Federal Reserve.
The median forecast in the December 15-17 survey showed Germany's 10-year bunds yielding 78 basis points less than the equivalent US Treasury notes in a year's time, compared with around 66 basis points less on Monday. Approaching 80 basis points, it would be at its widest since August 2000.
"Long term rates should continue to outperform the US Treasury market, reflecting a milder economic recovery in the euro zone and a less aggressive change in the monetary policy stance," said Pedro Ferreira da Silva at Banco BPI in Lisbon.
Treasury yields overtook Bund yields this spring, as expectations of monetary tightening in the United States grew. Higher official interest rates make bonds less appealing, prompting investors to sell government debt and reducing prices, which in turn pushes up yields.
Yields of benchmark US Treasury notes were seen climbing to 4.5 percent in three months, 4.8 percent in six months and 5 percent a year from now compared with current levels of around 4.2 percent.
Over the same 12-month period, the official Fed funds rate was forecast to rise by 125 basis points to 3.5 percent, doubling the hikes implemented since tightening started in June.
"Upside inflation risks and a more resilient economy add up to 50 basis points more to Fed tightening in 2005 than we (had) expected a month ago," said Richard Berner at Morgan Stanley in New York, whose forecasts for end-2005 US rates are in line with the consensus.
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