10-year yields to rise gradually in most cases – CE

Economists at Capital Economics think that most developed market (DM) central banks will look through temporary rises in inflation and leave rates unchanged until early 2023 at the earliest. Therefore, they forecast that the yields of 10-year DM government bonds will rise only gradually, in most cases, over the next couple of years.

Moves to be bigger in the US than in most other DMs

“Aside from New Zealand and Norway, where our expectations are broadly in line with those of investors, we are generally still more dovish than investors on the prospects for monetary policy in most other DMs over the next couple of years.”

“In the US, money markets are pricing in rate hikes in early 2023, about six months sooner than we expect. In the eurozone, we think that the ECB won’t hike rates until 2025 at the earliest, whereas investors are discounting some tightening from early 2023. In the UK, we have recently brought forward our forecast for the timing of the BoE’s monetary tightening to 2024, from 2026 previously. But this is still much later than investors seem to expect. Finally, in Canada, about a 100bp of rate hikes are discounted in the markets between early 2022 and end-2023, which is about 9 months sooner and ~25bp more than we project.”

“While we forecast 10-year yields will mostly rise between now and end-2023, reflecting tighter monetary policy beyond the next couple of years, the moves will be relatively small in our view and bigger in the US than in most other DMs. This is primarily because we think the prospects for economic growth outside the US are, for the most part, not as strong as in the US itself, due mainly to less expansive fiscal support. Accordingly, monetary policymakers in those countries may be less willing to accept a premature tightening in financing conditions.”