Yield Outlook - More upside for 5Y and 10Y yields
|The rise in both European and US yields has come earlier than we expected in, for example, Yield Outlook 6 Risk to yields skewed on the upside but mainly on a 12M horizon , which we published on 17 January.
We argue that the rapid rise in yields seen this year is now slowing down but that risk is still seen on the upside, especially if we look six to 12 months forward. We now forecast that 10Y US Treasury yields will rise to 3.30% (previously 2.90%) on a 12-month horizon. We expect German 10Y Bund yields to rise to 1.20% (previously 1.0%) on a 12-month horizon.We now see higher inflation expectations and higher interest volatility in 2018 and therefore a higher term premium than previously expected in both the European and the US markets. We also see 'real rates' moving higher as the global cyclical recovery continues. The latest boost to fiscal policy in the US will also add to the upside potential for 10Y yields, especially in the US, but will also have an impact on 10Y yields and rates in Europe
However, this said, it is not unusual that after a fixed income sell-off we see some stabilisation and some support for global bond markets. It is noteworthy that positioning, especially in the US bond market, has swung dramatically in favour of higher yields.
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