![Bond yields will rise next year](https://image.cnbcfm.com/api/v1/image/107170123-16716990641671699061-27296399873-1080pnbcnews.jpg?v=1671777075&w=750&h=422&vtcrop=y)
LONDON – Government bond yields are prone to rise in 2023 “for the wrong reasons”, in response to Peter Toogood, chief investment officer at Embark Group, as central banks step up efforts to shrink their balance sheets.
Over the past year, central banks around the world have gone from quantitative easing – buying bonds to boost prices and keep yields low, theoretically lowering the cost of borrowing and supporting spending in the economy – to quantitative tightening, including asset sales, with the opposite effect and, most significantly, stop inflation. Bond yields move inversely to prices.
Much of the movement in each the stock and bond markets in recent months has centered around investors’ hopes, or lack thereof, for a so-called “pivot” from the US Federal Reserve and other central banks away from aggressive monetary tightening and rate of interest hikes.
Over the past few weeks, markets have enjoyed a temporary rally on data indicating that inflation can have peaked in lots of major economies.
“Inflation figures are great, my predominant concerns next year remain the same. I still imagine bond yields will go up for the wrong reasons … I still think September this year was a pleasant warning of what could occur if governments proceed to spend money,” Toogood told CNBC’s Squawk Box Europe.
![Bond yields don't have to fall for investors to get a good return: DoubleLine](https://image.cnbcfm.com/api/v1/image/107168443-16714740351671474032-27247351501-1080pnbcnews.jpg?v=1671521638&w=750&h=422&vtcrop=y)
US Treasury yields rose in September, with the 10-year Treasury yield at one point exceeding 4% as investors tried to anticipate the Fed’s next move. Meanwhile, British government bond yields jumped so aggressively that the Bank of England was forced to intervene to make sure the country’s financial stability and forestall a widespread collapse of British pension funds.
Toogood suggested that the transition from QE to QT (or QE to QT) in 2023 will see bond yields rise as governments issue debt that central banks not buy.
He said the ECB had bought “every European sovereign bond in the last six years” and “swiftly next year…they do not try this anymore.”
Jan Zich | Bloomberg | Getty’s paintings
The European Central Bank has promised to begin withdrawing its bonds value 5 trillion euros ($5.3 trillion) from March next year. Meanwhile, the Bank of England has stepped up the pace of selling its assets and has said it will sell gilts for £9.75bn in the first quarter of 2023.
But governments will proceed to issue government bonds. “All of this will be shifted to a market where central banks theoretically not buy it,” he added.
Toogood said this modification in issuance dynamics will be as necessary to investors as the Fed’s “pivot” next year.
“You see bond yields, do they go down when the market is down 2-3%? No, they don’t seem to be, so there’s something interesting about the bond market and the stock market and so they’re correlated and I believe that was the theme this year and I believe we have now to look at out for that next year.”
He added that continued higher borrowing costs will proceed to correlate with the stock market by penalizing “underperforming growth stocks” and driving rotation towards invaluable market sectors.
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Some strategists have suggested that with financial conditions at their peak, liquidity in financial markets should improve next year, which may gain advantage bonds.
Nonetheless, Toogood suggested that almost all investors and institutions operating in the Treasury bond market have already made their move and re-entered the market, leaving prices barely up next year.
He said after having 40 meetings with bond managers last month: “All of them joined the party in September, October.”