- While we continue to see further upside for 10Y German Bund yields on a 12M horizon, we expect no major changes in 2017. This is also the case for Swedish, Danish and Norwegian yields.
- We do not expect the market to price an ECB tapering premium before 2018, as continued low inflation and a slightly less strong growth outlook are removing the need for tighter ECB monetary policy. We also expect the ECB to prolong its purchase programme into 2018.
- In the US market, not only Fed hikes but also a possible change in the Fed’s reinvestment policy will set the direction for yields. We see slightly higher US yields on a six-month horizon but again higher yields are mainly a 2018 story.
- We expect the 10Y Bund yield to rise to 0.80% and a 10Y US Treasury yield of 2.8% on a 12-month horizon.
Yields have fallen again
In the previous issue of Yield Outlook: Bond sell-off set to pause before resuming in the autumn, 17 March, we argued that the bond sell-off witnessed in Q4 and gaining momentum in Q1 would pause and that higher yields would mainly be a story on a 6M to 12M horizon.
We argued that the market had got ahead of itself when pricing in ECB rate hikes as early as Q1 18 and that the market in the US had now been priced more or less according to the Fed’s rate path. Furthermore, we highlighted the risk of a setback in risk appetite. The market was already positioned for higher bond yields, especially in the US, and expectations of economic data strength were high. We pointed to the high optimism in global equity markets in Q1. We also pointed to the French Presidential election and the risk that the polls would start to move in favour of Marine Le Pen. In respect of the latter, the rising support in the polls for the extreme left-wing candidate Jean-Luc Mélenchon is a new joker. Finally, we highlighted the risk that the global manufacturing cycle, which has been rising for many months, had peaked, which tends to put downward pressure on yields.
We were probably more correct than we thought. We called for a pause in the ‘bond selloff’ on the back of these arguments but we actually got a strong global bond rally over the last month. Yields on 10Y German bonds have traded as low as 0.15% and 10Y US Treasury yields have fallen from above 2.60% at the peak in March to 2.20% currently. The market has repriced the outlook for the ECB from an early hike in Q1 18 to a hike late in 2018.
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