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Ultra-low, and in some cases negative, sovereign bond yields may soon be history, bond strategists are not expecting a major move higher without a leap in inflation, a Reuters poll showed on Tuesday.
Bond strategists and economists have been wrong-footed for years predicting higher rates and yield curves returning to what they looked like before the financial crisis nearly a decade ago.
It has not materialised, but Donald Trump's US election victory last month sparked a deep sell-off in global bond markets, pushing yields higher and fuelling a dollar rally on expectations new fiscal stimulus will fan inflation and faster rate hikes from the US Federal Reserve.
The latest Reuters poll of 60 strategists, taken over the past week, suggests that many still think the recent surge in bond yields is more of a knee-jerk reaction than a definitive start of a new trend. Major sovereign bond yields are expected to rise only modestly next year.
"Even though the policy expectations of President-elect Trump may have sparked hopes of 'reflation' in the US economy, the current sell-off in Treasuries is overdone and underestimates the negative impact his trade policies might have on global trade and growth," said Stefan Koopman, market economist at Rabobank.
"A permanent steepening of the yield curve can only occur if there is a sustainable increase in inflation forecasts, which is unlikely while there is no convincing rise in wage inflation."
The US 10-year Treasury yield consensus forecast for 12 months from now is only about 20 basis points above where it was trading on Tuesday.
Benchmark bond yields in the euro zone, Britain and Japan are also expected to broadly track US Treasuries higher over the coming year.
The 12-month yield forecasts across major government bonds were also lower compared with a poll taken around the same time last year. Back then, the Fed was widely expected to raise rates for the first time in nearly a decade and follow it up with several more this year.
Still, a majority, 28 of 33 strategists, who answered an extra question said the long era of low sovereign bond yields has come to an end. The remaining five disagreed.
"2017 will see a continuation of the theme that started in (the second half of 2016) - modestly above-trend growth with building reflationary pressures," noted Fabio Bassi, head of European rates strategy at J.P. Morgan.
The question now though is whether or not the rally in yields as well as the US dollar will have a negative impact on economic activity and ushers in another round of lower bond yields. One of the most accurate forecasters says so.
The Fed is expected to take rates even higher next year and is almost certain to do so when it meets next week.
But most other global central banks remain either neutral or in easing mode and are expected to continue doing so for a prolonged period on account of weak growth and inflation.
That, coupled with the wave of anti-establishment sentiment running across Europe - after the Brexit vote and the Italian referendum - and ahead of national elections next year in France and Germany will also likely hold back bond yields.
"The weakness of world trade growth, the fragile recovery in several heavily battered emerging economies and the shift from the political middle ground to the extremes in various countries also mean a situation of continuing uncertainty," added Rabobank's Koopman.
A slim majority of analysts, 16 of 29, who answered an extra question said the risk of a rise in most or some euro zone government bond yields, similar to levels during the sovereign debt crisis, over the coming year was only "moderate". Ten strategists said the risk was "little" and the remaining three said "hardly any". None of them said "severe".
"Bond yields are generally rising for different reasons now and not due to fear of financial crisis in Europe, so the increase in bond yields should be more orderly this time around," said Scott Anderson at Bank of the West.
"Besides, the ECB will continue to be active bond buyers in the European market."

Copyright Reuters, 2016

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