Yield outlook: Rate hikes in the us

Danske Research Team Danske Bank A/S

The outlook for a potential peace agreement between the US and Iran and, not least, when traffic through the Strait of Hormuz will resume, remains uncertain. As a result, energy prices have increased since our latest update and global interest rates have likewise increased across currencies. The 2‑year EUR swap rate has increased by about 0.20pp to just under 2.90%, and the 10‑year EUR swap rate has gained just under 0.10pp to 3.10%. The move at the long end has been reinforced by mounting debt concerns, supported by renewed focus on the sustainability of public finances, particularly in the UK and Japan. On top of that, US economic indicators are increasingly showing signs of underlying demand‑driven inflationary pressure, which has led investors to raise their expectations of rate hikes from the Fed. Norges Bank delivered a rate hike last month, and three interest rate hikes from the ECB are priced in before the end of 2026. In other words, in recent months there has been a clear shift from market expectations of rate cuts to now rate hikes across economies and central banks.

Underlying inflationary pressure in the US – Rate hikes in sight

Since our latest Yield Outlook publication, we have updated our expectations for the Federal Reserve (Fed). We now expect the Fed to deliver two rate hikes, in December 2026 and March 2027, respectively, which would bring the key policy rate to 4.00‑4.25%. By comparison, the market expects only just over one rate hike. A number of different factors increasingly indicates underlying inflationary pressure in the US and combined with elevated energy prices, we expect the Fed to resort to rate hikes later this year. The labour market has been stronger than expected in recent months. Combined with the slowdown in immigration, which has led to a structural shift in the labour supply, this increases the risk of the economy overheating. At the same time, an increasingly clear picture is emerging of an expansionary fiscal policy with the new budget act, lower tariffs and potential stimulus measures connected to the elevated energy prices. Massive AI‑related investments not only support real growth in the economy but also appear to add to the inflationary pressure. The incoming Fed Chair Kevin Warsh has previously argued for the possibility of lower interest rates as a consequence of AI-related productivity improvements. However, it is currently hard to see the disinflationary effects from AI, and we therefore think rate hikes from the Fed are more likely.

ECB: Weak growth figures loom but rate hikes in sight over the summer

The ECB remains caught in a monetary policy trade‑off between high inflation and deteriorating growth prospects. Recently there has been a string of negative surprises, including a significant decline in consumer and business confidence, a weaker‑than‑expected services sector, tighter financial conditions, lower-than-expected GDP growth in Q1 and tighter credit conditions.

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Danske Research Team

Danske Bank A/S

Research is part of Danske Bank Markets and operate as Danske Bank's research department. The department monitors financial markets and economic trends of relevance to Danske Bank Markets and its clients.

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