Fulcrum Research: Mirror, Mirror, On the Wall, Which Bond Is the Fairest of Them All?

European political risk dominated 2017, with the German presidential and federal elections in February and September, respectively, and the French presidential and legislative elections in May and June, respectively. It was a year with a lot of variation with 10-year yields in most major global government bond markets trading within a 30-40bp range.

We believe risk for global yields is skewed to the upward side of the forwards in the medium-term. We expect the main drivers to be higher global real interest rates and an upward creep in inflation expectations. Although recent relatively benign inflation reports may continue to distract focus away from the prospect of reduction in central bank policy accommodation, we anticipate the forward path of the global short rates gradually to be re-priced higher.