Mounting evidence of worsening growth in big Western economies forced analysts to take an axe to yield forecasts for major government bonds in August, a monthly Reuters poll showed on Wednesday. Some of the downgrades were the biggest seen in a Reuters bond poll, after a month of poor economic data rekindled expectations - albeit slim - that the US and UK central banks could again try quantitative easing to boost growth.
The poll of more than 40 economists and fixed income strategists was the first since Standard & Poor's removed its top-notch "AAA" credit rating for the US government, which had sparked talk that yields could rise markedly. Instead, dozens of basis points were lopped off the median outlook for US, eurozone, UK, Japanese, Canadian and Australian two- and 10-year bond yields over the 12 months.
The US Federal Reserve's explicit promise on August 9 to keep interest rates near zero for the next two years had a profound effect on Treasury yield forecasts, particularly for two-year paper. Analysts more than halved their yield forecasts for the two-year T-note over the next year, which they now see yielding 0.6 percent in a year's time, compared with 1.5 percent seen in July.
Yield expectations for German Bunds and British gilts have also plummeted over the last month, with the latter emerging as an unlikely safe-haven hedge against a euro zone sovereign debt crisis that authorities have struggled to contain. Indeed, European stocks have lost 15 percent of their value since the July bonds poll, with Bund and gilt prices soaring in response. With budget austerity measures already under way in Europe, and in the pipeline in the United States, economic growth will likely remain poor while governments struggle to balance the books.
UNITED STATES All 29 common contributors from this poll and the July survey downgraded their forecasts for the 3-month USD LIBOR, 2-year and 10-year US T-notes for almost all time horizons. Analysts more than halved their yield forecasts for the 2-year T-note. From 0.21 percent on Wednesday, analysts see it yielding 0.3 percent in three months, 0.4 percent in six months and 0.6 percent in a year's time (compared with 0.7, 0.9 and 1.5 percent in the July poll).
The 10-year T-note, which on Wednesday yielded 2.14 percent, is expected to yield just 2.5 percent in three months - some 80 basis points less than the 3.3 percent in July's poll. Analysts then see it rising to 2.8 percent in six months (vs 3.5 percent in July's poll) and 3.1 percent in 12 months (vs 3.8 percent). For the three-month time horizon, a majority (33 of 42 economists) now expect the yields to fall to or below 2.7 percent, which was the lowest forecast last month.
EUROZONE All 21 common contributors from last month's poll slashed their forecasts for three-month euro LIBOR, the two-year Schatz and 10-year Bund yields. Given that economic weakness seems to be spreading from the euro zone's periphery to core economies Germany and France, eurozone interest rate expectations have fallen markedly over the last month.
Analysts expect the 10-year Bund to rise from Wednesday's 2.2 percent to only 2.5 percent in three months (vs 3.2 percent in July's poll), 2.7 percent (vs 3.4 percent in July) in six months and 3.1 percent in 12 months (vs 3.6 percent in July). Forecasts for the two-year Schatz yields were similarly slashed. Respondents chopped 100 basis points from the three-month horizon - to 0.9 percent from 1.9 percent last month. They saw this rising to 1.2 percent in six months, and 1.7 percent in 12.
BRITAIN Gilt yields hit fresh record lows since July's poll, thanks to a combination of investors fleeing euro markets and poor growth prospects for the British economy, likely keeping UK interest rates at rock-bottom levels until late next year.
Analysts expect the 10-year gilt to yield 2.8 percent in three months - some 60 basis points less than seen in July's survey. It yielded 2.4 percent on Wednesday morning. The poll showed this rising to 3.3 percent in a year's time, down from the 4.0 percent last month.
Similar downgrades were seen for the two-year gilt yield. Indeed, the spread of median forecasts between the two-year Schatz yield and the equivalent gilt has more than halved for the three-month and six-month horizon compared with last month's poll.
JAPAN Despite the ultra-low yields that have characterised Japanese government bonds for the last decade, economists still found room for significant downgrades to bond yields there.
Analysts saw the 10-year JGB yielding 1.2 percent in three and six months, up from Wednesday's 1.0 percent, before strengthening to 1.3 percent in a year's time - around 10 to 15 basis points less for each timeframe compared with July's poll. There was no change to the outlook for three-month yen LIBOR, given that the Bank of Japan has long been expected to keep near-zero rates until at least 2013.
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