Global bond yields will likely fall slightly in 2023 as the balance between demand and supply will improve by $1 trillion, strategists at J.P. Morgan said in a note.

There will be a $700 billion contraction in global bond demand next year compared to 2022, while bond supply will likely drop by $1.6 trillion, J.P. Morgan strategists, led by Nikolaos Panigirtzoglou, estimated in the note issued on Thursday.

"Based on the historical relationship between annual changes in excess supply and the Global Aggregate bond index yield, a $1 trillion improvement in the demand/supply balance would imply downward pressure on Global Aggregate yields of around 40 basis points," the Wall Street bank said.

J.P. Morgan said that while major central banks trimming their balance sheets in 2022 was the single largest contributor to deterioration in bond demand, sell-offs by commercial banks and retail investors were also much higher than estimates.

Eoin Treacy's view

There is a strong likelihood inflationary pressures will fall next year. There are three major reasons for believing that.

The first is the quick pace of tightening. Lifting rates by 300 basis points in less than a year has not yet had time to filter into the wider economy. When it does, demand will come down and take inflation with it.

The second is oil prices are rolling over. Since high oil prices inhibit economic growth, low prices should remove inflationary pressures.

The last is the tendency of bond yields to rise after the beginning of quantitative tightening and to collapse subsequently.
That suggests the peak recently posted in the yields is probably medium-term in nature.