Global central banks have started normalising monetary policy, pulling long yields up

The overriding conclusion from the series of important central bank meetings this week is clear: Central banks are increasingly concerned that the current surge in inflation is so pronounced that it can no longer be described as merely transitory and that we risk it gaining traction and becoming more persistent.

We expect that monetary policy will tend to not only push short but also medium and long-term US yields up in the course of 2022. We also expect the 2Y-10Y yield curve to flatten - the textbook response in a tightening cycle. We continue to expect 10Y US Treasury yields to increase to 2% by the end of 2022.

In respect of the ECB, the lesson of 2021 from the Fed is that we need to be a little cautious about basing our own expectations on what the central banks say about the future. Remember that the US Fed was describing inflation as transitory just a few months ago. Likewise, the ECB may well be wrong-footed on inflation - and given a core inflation forecast of 1.9% for 2022, little more would be required to ruffle the feathers of the ECB's hawks. All in all, however, we expect the ECB to keep policy rates unchanged in 2022, in part because European wage growth is set to remain limited. That being said, the ECB beginning to raise interest rates in 2023 could well be on the cards. As before, our reasoning is that the market is likely to increasingly price rate hikes into the curve in 2023 and 2024, and this would tend to push policy-sensitive yields up in the 2Y-5Y segment.

We expect the 10Y Bund yield to increase to 0.2% by the end of 2022.

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