LONDON (Reuters) - HSBC has revised up its year-end forecasts on 10-year German Bund yields to 90 basis points from 60 basis points, noting a “significant reappraisal” of expectations from the European Central Bank.
The bank said in a note sent on Tuesday that the change represented a return to a more bearish Bund yield forecast it had held three months ago, and noted the increase in euro zone yields and forward money market rates.
Money market pricing suggests investors have bought forward their expectations for when the European Central Bank will deliver its first rate rise since 2011.
Forward money market rates price in a 10 basis point rate rise from the ECB in early 2019.
“Core yields are likely to continue to adjust to a normalisation of policy rates,” the bank told clients.
HSBC also reckons that the recent rise in U.S. Treasury yields had taken the market back into “the buy zone”, adding that investors would enjoy the best risk-reward in the two-year Treasury sector.
In recent days, U.S. 10-year yields hit four-year highs beyond 2.88 percent and 10-year Bund yields rose above 0.7 percent for the first time in over two years.
But yields dived back on Tuesday as investors dumped stocks in reaction to stronger U.S. data that raises the possibility of more aggressive rate rises by the U.S. Federal Reserve.
Reporting by Sujata Rao; Editing by Dhara Ranasinghe; editing by