Yield Outlook - Italy moving to the background and Fed hikes to continue
|We continue to see modest upward pressure on yields and rates in Europe in 2019. The first ECB rate hike is moving closer and the ECB QE programme is widely expected to have ended. The latter has created some concerns that we could see a jump in yields like we saw in the US in 2013, when the Federal Reserve scaled back on bond purchases (tapering). In 2013, 10Y US yields rose more than 1% over a few months. However, given that the end to ECB QE has been well communicated and that reinvestment of bonds maturing is set to continue in 2019, it is not our main case that the end to QE will have a major impact on EUR rates.
We continue to see a further widening of the two-year spread between USD and EUR rates. The ECB is not expected to hike rates before December 2019. Furthermore, we expect the Fed to hike twice more this year and to continue hiking next year. Importantly, we still expect the Fed to raise the Fed funds rate above the longer run dot of 2.83% (the Fed's estimate of the natural rate of interest when the economy is normalised) in coming years. We see a peak at 3.25% in 2020.
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