June 26, 2018 / 10:30 AM / 2 months ago

Bond funds raise forecasts for US 10-yr yields, Fed rates-survey

LONDON, June 26 (Reuters) - Fixed income managers globally expect benchmark U.S. Treasury yields to rise faster than had been anticipated a few months ago, accompanied by rate hikes from the U.S. Federal Reserve, a Russell Investments survey on Tuesday showed.

Ten-year U.S. Treasury yields are forecast to rise to 3.28 percent over the next 12 months, a Q2 survey from the asset management firm showed. That was a sharp upward revision from the previous quarter, when Treasury yields were forecast at 2.92 percent for the year ahead.

The survey, which includes responses from 62 fixed income investment firms globally, also showed expectations for a flattening of the U.S. bond yield curve.

Expectations for a flatter U.S. Treasury yield curve, which has tended to signal the start of a recession in the past, shows most fixed income firms feel the Fed is “likely to over-tighten interest rates,” said David Jurca, senior research analyst at Russell Investments.

Economists polled by Reuters at the end of March predicted U.S. yields at 3.20 percent in a year’s time.

Ten-year Treasury yields stood at 2.89 percent on Tuesday, down from a seven-year peak hit last month above 3 percent.

The gap between two- and 10-year U.S. bond yields is at around 35 basis points, close to its tightest since 2007.

Speculation that the U.S. Federal Reserve could raise rates more than expected this year has been one source of upward pressure on U.S. bond yields.

Earlier this month, the Fed lifted rates by a quarter of a percentage point to a range of 1.75 percent to 2 percent, and dropped its pledge to keep rates low enough to stimulate the economy “for some time”.

According to the Russell Investments survey, 92 percent of fixed income managers polled said they expected three to four U.S. interest rate hikes over the next 12 months, with the Fed Funds rate peaking at 3 percent.

That was up from the first quarter survey, which showed 58 percent expected three rate hikes and rates to peak at 2.65 percent.

In a poll taken after the Fed rate hike this month, Wall Street’s top banks said they expected the Fed to raise twice more this year and three times in 2019.

Reporting by Dhara Ranasinghe Editing by Keith Weir

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