Analysts at Danske Bank believe that many of the factors pushing bond yields lower during the past couple of months are of a temporary nature. They see that the outlook will probably be much different on a six to twelve-month horizon.
“Much of the fall in yields in the US and Europe came in November and December as global equity markets came under pressure and it became clear that, not least, GDP growth in Europe and China had shifted down a gear. Also, during this period, the Federal Reserve adopted a more dovish tone on rate hikes, and markets began speculating about the chance of the Fed’s next move being a cut rather than a hike.”
“The picture has looked slightly different in 2019. The US economy has not shown the same signs of weakness as the eurozone economy, and US yields have stabilised whereas European yields have continued to decline, with spreads between 10Y EUR and USD swap rates widening again. In particular, Q4 18 and the current quarter have looked weaker in the eurozone than generally expected just a few months ago. New GDP growth forecasts published by the European Commission last week caused a stir, as eurozone growth in 2019 was lowered from 1.9% to 1.3%. The Commission shaved 0.7pp off its growth outlook for Germany, cutting its 2019 forecast from 1.8% to 1.1%.”
“We believe that many of the factors pushing bond yields lower during the past couple of months are of a temporary nature, and the outlook will probably be much different on a 6M-12M horizon. Our main scenario is for the global economy to be picking up in the second and third quarters. Already, there are budding signs that the Chinese economy is recovering, and we project the Germany domestic economy to strengthen in Q2 19. Avoiding a hard Brexit and the US and China coming to terms on a trade agreement are also part of our main scenario.”
“Our forecast thus relies on many factors developing favourably, and we continue to expect bond yields to climb sightly over the next 12M period. For example, we expect Germany’s 10Y Bund yield to rise from currently 0.1% to 0.5% (previous forecast 0.7%). This brings our range forecast back to 0.35–0.75%. We expect the 10Y US Treasury yield to rise from currently 2.7% to 2.9% (previous forecast 3.15%).”
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