BIS Says Longer-Term Bond Yields May Rise on Budget Concern

By Klaus Wille

Sept. 14 (Bloomberg) -- Longer-term bond yields are likely to rise amid investors’ concern about budget deficits built up by governments to fight the global recession, the Bank for International Settlements said.

“Fiscal sustainability concerns are likely to affect forward yields that span distant horizons, which are less influenced by near-term expectations about inflation, economic growth and monetary policy,” the Basel, Switzerland-based BIS said in a quarterly report yesterday. The BIS expects budget concern to put “upward pressure on “real forward rates.”

Governments from the Group of 20 nations have pumped more than $2 trillion into their economies, swelling their budget deficits. The U.S. fiscal shortfall is already around 11 percent of gross domestic product, the most since World War II, and the U.K. deficit will be around 12.4 percent this year.

The euro region’s five-year, five-year forward rate has risen to 2.67 percent from 2.51 percent at the end of March. Five-year, five-year forwards are a measure of investors’ expectations for inflation over a five-year period starting five years from now.

At the same time, the BIS said economists and investors expect the global economic slump to keep a lid on inflation.

“Long-term” price pressures “appear contained for now, despite surging fiscal deficits and record-low monetary policy rates,” the BIS said in its report for the period from the end of May to September. “This may reflect the belief that the current high level of economic slack will persist for some time.”

To contact the reporter on this story: Klaus Wille in Zurich at kwille@bloomberg.net