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Catalysts For Higher Global Bond Yields

* December 1, 2016

From the U.S., the most likely catalyst for sharply higher bond yields will be the Fed signaling that it will adopt a quicker pace of rate hikes.



With inflation still below target and market-based measures of inflation compensation still depressed, the Fed will be in no rush to signal a more hawkish policy stance. We expect the Fed will follow through with an expected rate increase in December, but the median expectation will continue to call for only two more hikes in 2017.

The Fed is only likely to shift toward a more hawkish policy stance once inflation expectations are more firmly anchored around their 2% target. This corresponds to a range of 2.4-2.5% on the 5-yr/5-yr forward TIPS breakeven inflation rate. Assuming that U.S. economic growth continues to accelerate into next year, then the 5-yr/5-yr breakeven rate could reach this target sometime in the middle of 2017. At that point, a more hawkish Fed policy becomes more likely.

Bottom Line: The “Trump Tantrum” is likely to take a pause soon. If U.S. growth is strong in 2017 and the Trump administration is making progress in implementing its stimulative policies, a hawkish Fed could send bond yields higher in the second half of 2017.

https://blog.bcaresearch.com/catalysts-for-higher-global-bond-yields

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