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Bonds yield to rise 'for the wrong reasons' next year, says strategist

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Bond yields will rise 'for the wrong reasons' next year, strategist says

LONDON – Government bond yields are likely to rise in 2023 “for the wrong reasons”, according to Peter Toogood, chief investment officer at Embark Group, as central banks step up efforts to trim their balance sheets.

Central banks around the world have shifted in the past year from quantitative easing – which drives them to buy bonds to raise prices and keep yields low, in theory reducing borrowing costs and supporting spending in the economy – to quantitative tightening. , including asset sales to have the opposite effect and, more importantly, contain inflation. Bond yields move inversely to prices.

Much of the movement in stock and bond markets in recent months has centered on investors’ hopes, or lack thereof, for a so-called “pivot” by the US Federal Reserve and other central banks away from aggressive tightening of the monetary and interest rate policy. hiking.

Markets have enjoyed brief rallies in recent weeks with data indicating that inflation may have peaked in many major economies.

“Inflation data is great, my main concern next year remains the same. I still think bond yields will rise for the wrong reasons 🇧🇷 I still think September of this year was a good warning about what might happen if governments keep spending,” Toogood told CNBC’s “Squawk Box Europe” on Thursday.

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In September, US Treasury yields soared, with the 10-year yield at one point crossing 4% as investors tried to predict the Fed’s next moves. Meanwhile, UK government bond yields jumped so aggressively that the Bank of England was forced to step in to ensure the country’s financial stability and prevent a widespread collapse of Britain’s final wage pension funds.

Toogood suggested that the transition from quantitative easing to quantitative easing (or QE to QT) in 2023 will increase bond yields because governments will issue debt that central banks are no longer buying.

He said the ECB had bought “all European sovereign bonds over the last six years” and, “suddenly next year … they won’t do that anymore.”

John Zich | Bloomberg | Getty Images

The European Central Bank has pledged to start unloading its 5 trillion euros ($5.3 trillion) of bonds starting in March next year. The Bank of England, meanwhile, has increased the pace of its asset sales and said it will sell £9.75 billion worth of gilts in the first quarter of 2023.

But governments will continue to issue sovereign bonds. “All of that will carry over into a market where central banks are supposedly not buying anymore,” she added.

Toogood said this change in issuance dynamics will be as important to investors as a Fed “pivot” next year.

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“You notice bond yields, are they collapsing when the market is down 2-3%? No, they’re not, so something is interesting about the bond market and the stock market and they’re correlated, and I think this one It was this year’s theme and I think we have to be careful with that next year.”

He added that the persistence of higher borrowing costs will continue to correlate with the stock market, punishing “unprofitable growth stocks” and driving rotations into value sectors of the market.

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Some strategists have suggested that, with financial conditions reaching peak tightening, the amount of liquidity in financial markets should improve in the coming year, which could benefit bonds.

However, Toogood suggested that most investors and institutions operating in the sovereign bond market have already made their move and re-entered, leaving little head start for prices next year.

He said that after holding 40 meetings with bond managers in the past month: “Everybody joined the party in September, October.”