Rates by now should grind a little bit higher by 2014 across the developed markets in the hopes that the economic data will improve. The sell-off should occur in spite of the substantial difficulties such as the forward moving guidance in the U.K. and the U.S. as well as additional easing policy in Japan alongside the weak inflation data in Europe. It is predicted that the 10-year rates in most developed markets by the end of the year will be 20-30bp above the projected forwards.
This year by far has been the most complicated one especially for fixed income investors. Rates have had sharp re-pricing in the summer in most bond markets wherein Barclays Aggregate Index has returned -1.9 % in the first three quarters of this year and the profit it generated began to rotate out of bond funds. Analysts had expected to move higher rates by next year but with some deficiencies to be carried along with it this year.
Firstly, the magnitude of the move for next year should be a lot lower than it is at present. In the U.S. there is this anticipation that a 10s to finish in 2014 will be at around 3.5 %, 20bp above the forwards whereas Europe is quite similar in the expectations that the 10-year rates will end by 2014 at 2.5 %, 30bp above the forwards.
Secondly, the data are likely to be a lot sturdier in most developed countries in the coming years and should reveal a solid rate on the rise. Most importantly, rates should move up a notch in spite of the substantial difficulties encountered in the U.S. with the Fed possibly giving forward assistance to avert rates from rising when it should begin tapering.
In Europe, the crippling inflation and related actions by the ECB should keep short-term rates lower but are unlikely to prevent long rates from following the U.S. and in the U.K. The MPC’s forward guidance will still push through and continue to be lower in interest than what the markets are presently pricing which many predict will continue next year.
Furthermore, the Japanese 10-year rates should also move up next year even if the BOJ eases policy again and any of the additional purchases are likely to be concentrated at the very long end of the JGB continuum and the attempts to support inflation should relatively push up the term premium within the 10-year sector.