Inflation fears to drive bond yields higher: Reuters poll

LONDON (Reuters) - Mounting inflation pressures in Europe and an improving U.S. economy prompted bond strategists to ratchet up their U.S. Treasury, bund and gilt yield forecasts in January, a Reuters poll showed.

European Central Bank President Jean-Claude Trichet sounded a warning at this month's policy meeting after inflation spiked in December, which in turn had a pronounced impact on bond yield forecasts from more than 50 respondents.

Compared with the last Reuters poll taken in November, forecasters expect to see a steeper yield curve this year, with the spread between two- and 10-year maturities on U.S., UK and German debt generally expected to widen.

"The market anticipates worsening news on inflation," said Alan Clarke at BNP Paribas. "Although interest rate hikes are some way off, particularly in the U.S., that will keep the 2-year yields anchored quite low. But the 10-year yields will pick up, and that will lead to steepening."

There were hefty upward revisions to the 10-year bund yield outlook after data showed euro zone consumer prices grew at an annual rate of 2.2 percent in December, above the ECB's preference its says close to, but below, 2.0 percent.

On Thursday, after completion of the polling, preliminary figures showed German annual inflation picked up slightly in January to an EU-harmonized 2.0 percent from 1.9 percent.

Strategists heaped 50 basis points onto their 10-year bund yield forecast for mid-year and 40 basis points onto the end-year compared with the last poll.

The poll now shows it yielding 3.2 percent by end-June and 3.5 percent by year-end.

Bunds had benefited from an investor flight to quality from assets in debt-laden peripheral countries like Portugal and Spain, tipped by some as next in line after Ireland and Greece to apply for a bailout if they can no longer access debt markets affordably.

Thirteen analysts who answered an extra question said Portugal would issue a total of 20 billion euros ($27.41 billion) of government bonds in 2011, Spain 94 billion euros, and Belgium 36 billion.

GILTS YIELD TO INFLATION

Upward revisions to the 10-year UK gilt yields were less pronounced, even though inflation there has ballooned to almost twice the Bank of England's 2 percent target.

Analysts expect the 10-year gilt to yield 3.73 percent in six months and then 4.08 percent by the year-end, compared with around 3.69 percent on Thursday.

"Worse news on inflation would probably add to that, and also the market has sold off since the last poll, so (the upgrade to yields) doesn't surprise me too much," said Clarke.

U.S. Treasury yield upward revisions were slightly less pronounced but still significant, generally ranging between 40 and 60 basis points for each timeframe.

Federal Reserve policymakers have sounded far more relaxed than European counterparts about the U.S. inflation outlook, although the poll suggested demand for Treasuries would wind down as the American economic recovery gains momentum, pushing yields higher.

Bond strategists see the 10-year T-Note yield hitting 3.75 percent by the end of the year, up from its current level around 3.44 percent.

Fed policymakers last month reaffirmed their commitment to a $600 billion bond purchasing scheme that supported the Treasury market, although there is little chance that the scheme would be extended as the economy improves.

Economists polled by Reuters expect the U.S. economy to outpace Europe this year with growth of around 3 percent.

Japanese government bond yields, depressed by an ongoing battle against deflation, will creep up gradually in 2011, the poll showed, although at a far slower rate than Western peers.

On Thursday, after the poll was conducted, Standard & Poor's cut Japan's credit rating for the first time 2002 in response to its mounting debt pile.

Analysts saw the 10-year JGB rising from its present level near 1.22 percent to 1.3 percent by end of the second quarter, and then 1.38 percent at year-end.

(Analysis by Sumanta Dey in Bangalore, Polling by the Bangalore Polling Team, Editing by Ron Askew)