Any significant rise in global rates and yields over the next three to six months still looks relatively unlikely.
The ECB is buying EUR80bn of bonds every month and we expect it to announce as early as next month that bond purchases will be prolonged for another six months, so that they run until September 2017 at least.
The contagion to the US and European economy from Brexit has so far been modest but the UK economy is in our view heading for recession in H2 16. The Bank of England has already reacted to the bleak economic outlook and delivered a substantial easing package but more is in store, in our view. Hence, we expect the strong summer downward pressure on long UK yields and rates to continue in the autumn, which would push investors towards other 'high' yield markets - another factor potentially keeping a solid lid on global yields.
However, 'the global hunt for yield' does not mean that we cannot see yields moving slightly higher next year as we expect. If we are correct that the Fed will resume its rate-raising campaign in June next year, we could see upward pressure on US yields on a 12M horizon. It should affect especially the short end of the US treasury market as the market is not priced for a full hike before end-2017.
There is a risk that both we and the market are far too complacent about the risk of US rate rises over the next 12 months. Several FOMC members have recently warned that a rate hike at the September meeting should certainly not be ruled out. If that is the case it poses a risk to the upside for global yields.
The market may also be too complacent on the outlook for inflation.
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