By Andy Bruce
LONDON, Sept 28 (Reuters) - Major government bond yieldswill creep higher at a far slower pace than forecast threemonths ago, according to a Reuters poll of market strategistswho saw no return to pre-crisis levels soon.
Faced with a cooling global economy and a growing chance theU.S. Federal Reserve will further ease its policy, forecasterschopped their yield forecasts for U.S., euro zone, British andJapanese government bonds compared with June's survey.
Nowhere was this more apparent than in the outlook for10-year U.S. Treasuries, for which strategists scythed awaybetween 80 and 95 basis points from each of the three-, six- and12-month median yield forecasts.
Respondents also lopped between 40 and 60 basis points offthe equivalent German and British yield forecasts, citing theadditional factor of fiscal austerity measures in Europe.
Last week, 10 out of 16 primary dealers polled by Reuterssaid more quantitative easing (QE) by the Federal Reserve waslikely, possibly by the end of its next rate-setting meeting onNovember 3.
"The focus has moved broadly from sovereign risk concernstowards worries about the economy, particularly in the U.S.,"said Laurent Frasolet of Barclays Capital in a research note.
He said the speculation about further QE by the Fed wouldkeep rate markets broadly in check, with economic data unlikelyto paint a clear picture soon.
Median forecasts from the poll showed the 10-year Treasurynote yield rising from Tuesday's 2.53 percent to 2.70 percent inthree months, 2.80 percent in six and 3.20 percent in a year.
That compared with forecasts in June's survey of 3.50percent in three months, 3.75 percent in six and 4.1 percent in12 months.
The latest survey also showed expectations of a flatter U.S.yield curve compared with the poll of three months ago,reflecting a stronger chance the Fed will step in again to buygovernment bonds.
There was a similar cut in yield forecasts for two-year U.S.Treasuries, while predictions for yields on German Schatz andBritish two-year gilts were also slashed, albeit to a lesserextent.
While U.S. orders for durable goods and business spendingfigures last week eased fears the world's biggest economy washeading into a recession, the extent of its slowdown is stillunclear.
Rising prices for both risky and safe-haven assets haveprovided few clues.
Gold hit a record high on Monday and U.S. stocks pausedafter a four-week rally, while Treasuries also rallied thanks toexpectations of more QE and worries about Irish state finances.
MONEY MARKET MOVES
The poll also showed a divergence in money market forecasts.The U.S. three-month LIBOR rate is seen rising modestly to 0.45percent in a year from Tuesday's fixing of 0.29 percent,restrained by the likelihood the Fed will extend its easypolicy.
By contrast, the European Central Bank is already windingdown its unlimited liquidity operations, a factor that willeventually drive euro LIBOR to 1.25 percent in 12 months from0.83 percent on Tuesday, the poll showed.
This was one of the few consensus forecasts that was higherthan in the June poll.
Faced with austerity measures in Europe and the likelihoodinterest rates there will stay low for some time, strategistsslashed their British and German yield forecasts.
Strategists said in an answer to an additional question thatthe spread between 10-year Bunds and the equivalent Treasurynote would peak at a median 40 basis points over the next year,from around 26 points on Tuesday.
"The favourable outlook for Treasuries, fading euro zonegrowth and periodic tensions in the periphery shouldkeep the bid on Bunds pretty solid," said economists from BNPParibas in a note.
Gilts have also been supported by rumours of a resumption ofquantitative easing in the United States, and to a lesser extentby the Bank of England.
Strategists said they expected the 10-year gilt yield torise to 3.8 percent in a year from around 2.93 percent now. (Polling by Bangalore Polling Unit, editing by Tim Pearce)