Government Bond Yields Expected to Stay Low as Inflation Fears Ease

As of this writing, bond yields are near all-time lows, with the U.S. 10-year Treasury yield hovering around 1.4 percent. Economists expect this level to stay relatively low for the foreseeable future, as the Federal Reserve is still pumping money into the economy through its $4.5 trillion bond buying program.

The U.S. Federal Reserve indicated on July 25 that it will keep interest rates low until at least late 2015, in order to stimulate the economy. The Fed’s latest statement on the U.S. economy, released on July 13, showed that economic growth was modest at best and that substantial job losses had occurred during the Great Recession.

The US two-year Treasury note yield is expected to stay below its peak level at 2.5 percent after a decline of nearly 30 basis points from last Friday’s close, according to a Reuters poll of economists. This is likely the last drop many bond traders will see before the election, but it may still be too high for the Federal Reserve to raise interest rates at its next meeting in November. “This is what investors in the bond market want. They are happy to buy Treasuries when they are cheap,” said John Briggs, portfolio manager at U.S. Bank Private Client Reserve.

U.S. and European government bond yields rose Thursday after optimistic business surveys in Europe, but investors said recent growth had been excessive and that fears that inflation would soon force central banks to raise rates had subsided. Encouraging data from European purchasing managers’ surveys of the service sector have fuelled hopes of a pick-up in economic growth, although the inflation outlook on the continent remains significantly weaker than in the United States. Investors say the European Central Bank is unlikely to change its volume to buy bonds at next week’s interest rate meeting.

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A five-part course from WSJ columnists that introduces you to the basics of investing, delivered to your inbox. German 10-year yields fell to minus 0.181% on Thursday, after hitting a two-year high of minus 0.108%, Tradeweb reported. The yield on 10-year US Treasuries also rose slightly to 1.627% from 1.591% on Wednesday. This is also lower than the recent high of 1.683% and the March high of about 1.73%. In recent weeks, yields have risen sharply and bond prices have fallen as investors fear that rising inflation will force central banks to tighten monetary policy by reducing their bond purchases. In Europe, some members of the ECB’s Governing Council have suggested that the central bank should start reducing its bond purchases even as inflation expectations in Europe remain low. However, Isabelle Schnabel, a German member of the central bank’s governing council, said it would be a big mistake to end monetary policy support too soon. word-image-1396

The European Central Bank is expected to maintain the size of its bond-buying programme at its next meeting.

Photo: Alex Kraus/Bloomberg News This has been a big source of confusion in Europe, said Mike Bell, global market strategist at J.P. Morgan Asset Management. There is more diversity of political views at the ECB than at the Federal Reserve. He added that investors are overexcited about the possibility of interest rates in the U.S. and Europe being raised sooner than J.P. Morgan Asset Management expects. We still think bond yields could rise, but there has been a big jump in a very short period of time, Bell said. German 10-year yields started the year at minus 0.6%, while 10-year Treasuries were below 1%. Bell thinks German interest rates could return to zero by the end of 2021 and Treasury yields could reach 2% in the next 12 months. Inflation fears have increased in the US, but many investors and analysts still expect bond purchases to be scaled back and interest rates to be raised soon. Europe is starting to recover as the Covid 19 crisis subsides, but it lags behind the US on a number of indicators. Analysts say the euro zone has achieved less than half of its goal of vaccinating 70% of adults, and that the financial incentives have been slower, smaller and less consumer-oriented than the U.S. version. The inflation outlook in Europe also looks weak. Morgan Stanley economists say the key interest rate will be higher than the ECB’s target of less than 2% this year, but will come close, only because of energy costs and higher sales taxes in Germany. They estimate that without these factors, inflation will be well below target this year and will remain at that level in 2022, even with energy. The recovery in consumer demand in the U.S. just hasn’t been felt in Europe, said Dominic White, head of economics at Absolute Strategy Research. Europe will see an increase in spending when it opens, but it will not be at all like we see in the United States. Write to Paul J. Davis at [email protected] Copyright ©2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8 Published in the print edition of 4. June 2021 Business Review helps boost European and US bond yields.The world economies have turned the corner, and the chances of a global recession now appear less likely. Therefore investors have been betting that the Federal Reserve will keep interest rates low until the U.S. economy is ready to take full advantage of the low interest rates. Markets are anticipating that the U.S. economy is likely to be in a strong economic condition for some time.. Read more about current bond yields and let us know what you think.

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