Monetary Policy Seen Driving 10-Year Bond Yields – Capital Economics

Monetary Policy to Remain the Primary Force Behind Bond Yield Movements

According to Diana Iovanel, Senior Markets Economist at Capital Economics, the outlook for 10-year sovereign bond yields will be shaped primarily by domestic monetary policy decisions. In a recent note, she argued that central bank rate cuts are likely to deviate from market expectations across multiple regions.

Interest Rate Cuts Likely to Differ From Market Pricing

Iovanel forecasts that:

• Australia, the euro area, Switzerland, and the US will cut rates less than markets currently anticipate.
• In contrast, the UK, Canada, and New Zealand are expected to cut more deeply, potentially pulling bond yields lower than market-implied levels.

"We think policy rates will be reduced less than the market is currently pricing for in Australia, the euro area and Switzerland, and in the U.S.," said Iovanel. "Meanwhile, central banks in the U.K., Canada and New Zealand may ease further."

Implications for Global Fixed-Income Markets

This divergence in expected monetary policy stances suggests a shift in relative sovereign debt attractiveness. Countries expected to cut more could experience a decline in bond yields, making their bonds more appealing to investors focused on capital gains, while others may see yields stabilize or rise.

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