Yields set to tick up later in 2021 as the US labour market improves and the Fed starts tapering

We expect US rates and yields to increase late in 2021 as growth really spreads to the labour market and the Fed starts tapering its asset purchases. The US 10Y yield will probably hit 1.7% (previous forecast: 2.0 %) by the end of 2021 and 2% (2.2 %) on a 12M horizon.

However, in the coming months markets are likely to focus on 1) whether inflation is actually temporary, 2) whether the economic cycle and growth have topped, 3) whether the Delta variant prompts further hospitalisations and restrictions and 4) whether the US labour market improves, which is a focus for the Federal Reserve. Hence, we expect range trading in coming months - with a slight upside risk to both European and US long yields.

The ECB strengthened its forward guidance at the July meeting, emphasising that policy rates are set to remain at current or lower levels until the ECB sees inflation on track to reach 2% well ahead of the end of its projection horizon (typically one and a half years) and durably for the rest of the projection horizon. Note, not least, that the ECB is ready to accept that inflation is expected to move - or in fact moves - moderately above the 2% target for a transitory period.

It will probably be quite difficult for the ECB to present a forecast meeting these requirements in the coming years. Hence, we no longer expect markets to price early rate hikes from the ECB - not even as the first US rate hikes move very close. We have therefore lowered our forecast for eurozone 5Y yields for the next 12 months, which also feeds into our 10Y yield outlook for the eurozone. We now expect the German 10Y yield to increase to -0.25% (0.0 %) by the end of 2021 and to 0.1% (0.3 %) 12 months from now.   

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