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LONDON, Oct 4 (Reuters) - The only way for bond yields is up, right?
Not according to Steven Major, global head of rates strategy at HSBC, who correctly called the steep fall in global bond yields in recent years and who on Tuesday predicted they will remain at current historical lows for another five years.
Benchmark government borrowing costs this year have fallen to their lowest levels ever in Britain, Japan and the euro zone - below zero in the latter two regions - and are close to record lows in the United States.
Waves of central bank bond purchases and interest rate cuts in the face of sagging growth and persistently low inflation in a climate of rising political uncertainty have given added impetus to the 30-year decline in global yields.
Most analysts reckon the bond market's 30-year bull run, the world's longest, is over and that yields have nowhere else to go but up. Deutsche Bank, for example, said that rising interest rates, yields and inflation will be a feature of the next 35 years.
But Major at HSBC argues that the huge overhang of global debt depresses growth and therefore keeps real natural interest rates low. Central bank balance sheets will remain bloated, and quantitative easing stimulus will continue, he argues.
"This bull market is not over. Just because yields have fallen, they do not have to rise," Major said in a note to clients on Tuesday. "In 2021, yields will be no higher than they are now."
He expects the 10-year U.S. Treasury yield to end next year at 1.35 percent compared with 1.62 percent currently, Germany's to be -0.20 percent compared with -0.10 percent now and Japan's to be a downwardly revised -0.20 percent, compared with -0.06 percent currently.
Inflation is "non-existent" in large parts of the developed world, debt levels have continued to rise across developed and emerging markets, and the post-crisis policies of the last decade have failed to lift growth, Major argues.
There would have to be a "major game-changing event" for bond yields to rise significantly, he said. That may include a rise of populism triggering a fundamental shift in government policy somewhere, or a significant overhaul in central bank mandates.
Economic data might be much stronger than expected, but on the other hand "a move towards recession would both validate low yields and argue that they should remain low." (Reporting by Jamie McGeever and Dhara Ranasinghe; Editing by Hugh Lawson)