Brexit or not, global yields are set to stay low for now – Danske Bank
|Chief Analyst, Arne Lohmann Rasmussen at Danske Bank, suggests that any significant rise in global rates and yields over the next three to six months looks relatively unlikely, in his view.
Key Quotes
“The ECB is buying EUR80bn of bonds every month and given the still quite optimistic inflation forecast from the ECB, we believe that later this year it will announce that the bond purchases will be prolonged for another six months so that they run until September 2017 at least.
In addition, the Bank of Japan (BoJ) looks set to continue buying bonds at a record pace in 2016 and 2017. Therefore, although we expect the Fed to hike rates once this year, we expect the effect on the long end of the curve to be modest.
However, recently we have seen a new dive in global yields. Part of the reason is concerns ahead of the upcoming UK EU referendum – safe-haven buying. Our main scenario is that the UK will remain in the EU. However, with the polls so close, a Brexit certainly cannot be ruled out.
It would be wrong, in our view, to believe that we would see a sharp rise in global yields if we do not see a Brexit next week. The global ‘hunt for yield’ will not disappear. The ECB and BoJ will still be buying a tremendous amount of bonds in the market. The concerns about the global economy will still be evident. We still do not know whether the recent slowdown in the US labour market reflects an underlying weakness in the US economy or if the US economy will regain speed as we forecast. Hence, we still expect 10Y German government bond yields to stay close to zero for the next six months even if we do not see a Brexit.
However, if we are correct that the Fed will resume its hiking campaign in the autumn, we could see small upward pressure on 10Y yields.
What if we see a Brexit?
If we do see a Brexit, the global downward pressure on yields is likely to intensify. The ECB will most likely come up with a policy response if it sees signs that the Eurozone economy is being affected, the Fed will effectively go on hold and the BoJ might have to react to an expected appreciation of the yen. In a Brexit scenario, we could see 10Y German yields dropping to -20bp or lower.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.