Lessons From Japan Mean Treasury, Bund-Yield Outlook Cut at HSBC

(Bloomberg) -- The breakneck rally in global bonds still has some way to go, according to one of the most bullish forecasters.

While benchmark Treasury yields have already plunged almost 100 basis points so far this year to 1.74%, they are likely to decline to 1.50% by the end of the year, according to HSBC Bank Plc.

Over in Germany, 10-year yields will end 2019 at -0.80%, compared with an earlier forecast of -0.20%, Steven Major, head of fixed-income research at the bank, wrote in a note titled, “Lessons from Japan.”

Stagnant inflation and a world of near-permanent central bank easing -- which has come to be known as Japanification -- will be the key factor driving yields lower, according to Major and his colleagues Lawrence Dyer and Daniela Russell.

“For bonds, Japanification means permanently low yields and curve flattening that extends up the curve from shorter maturities,” wrote Major, Dyer and Russell. “It also means lower yields elsewhere as trillions of dollars flow to places that offer better returns.”

Long End of EUR Swap Curve Breaks Under Weight of Japanification

The stock of investment-grade debt yielding less than zero globally topped $15 trillion this week, a fresh record, while the entire German curve is in negative territory -- something that is unprecedented among major debt markets. The main risk to HSBC’s forecasts come in the form of a revival in inflation due to sustained wage increases or a “reversal of globalization,” the strategists said.

HSBC’s earlier forecast for 10-year Treasuries was for a year-end level of 2.10%.

To contact the reporter on this story: John Ainger in London at jainger@bloomberg.net

To contact the editor responsible for this story: Ven Ram at vram1@bloomberg.net

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