Bond Markets Buck Forecasts to Rally in 2015 but Yields Will Rise

In recent years accurately forecasting trends in main market government bond yields has proven difficult for most commentators. Will 2016 be the year rates finally rise?

Andy Brunner 9 December, 2015 | 9:15AM

Having been completely wrong-footed last year, 2015 began with leading commentators once again forecasting higher global government bond yields. Although somewhat nearer this year, most were not even remotely close as government yields have declined in all the main markets year to date, albeit with extreme volatility through much of the year. UK 10-year gilt yields, for example, have ranged between a low of 1.33% last January to a high of 2.19% in June, resulting in long-dated maturity’s returns being more equity-like with eight of the eleven months so far this year recording gains in excess of +/-2%.

Yields have declined in all the main markets year to date, albeit with extreme volatility

Despite high volatility 10-year yields in the US and UK are little changed year to date with German bunds the main mover following the European Central Bank’s decision to initiate an asset purchase programme. Bund yields collapsed then soared but have declined a substantial 33 basis points year to date. Shorter dated yields also collapsed, two-year bunds are currently -0.44% and indeed, yields are negative out to seven years. Conversely, the prospect of rate hikes pushed two-year yields substantially higher in the UK and particularly in the US where the yield curve is now close to a low for this cycle, with the current 125 basis points 10-2 year spread broadly half-way between the 2007 lows and 2011 peaks.

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Andy Brunner

Andy Brunner  is Head of Investment Strategy, Morningstar UK

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