Eurozone yields: Forecasts slightly lowered - Danske Bank

Analysts at Danske Bank, lowered the 12M forecast for the Bund to 1.0%. They warn that in a year, markets could begin pricing ECB rate hikes that could lead to higher long-term yields.

Key Quotes:

“The Italian bond market has calmed somewhat. Yield spreads have been rather lower throughout June and the pronounced fluctuations we saw in May have disappeared. The 10Y spread is hovering around 215bp, which is, nevertheless, 75-100bp higher than prior to the political crisis kicking off. We now see less of a risk that the situation could spiral into a full-blown debt crisis. We estimate that the crisis dynamic has peaked, as the Italian politicians have softened their rhetoric and, as already mentioned, Italian yields and yield spreads have stabilised. Safe-haven flows into German and Danish government securities have consequently eased.”

“Our yield forecast now assumes the market no longer pricing in the probability of a H1 19 rate hike and, as a result, we have lowered our 3M and 6M 10Y yield forecasts slightly."

“Our 12M forecast for 10Y Bund yields is now 1.0%, down from 1.1% previously. Still, on a 12M horizon we do expect the market to begin pricing rate hikes for late 2019 and through 2020, which would tend to push long-term yields up a bit”.

“We continue to expect a steeper 2Y10Y German yield curve. The ECB maintains a relatively tight grip on the short end of the curve, especially with the first ECB rate hike not expected until late in 2019 and due to the ECB’s forward guidance. However, we still expect the 10Y segment of the curve to be pushed higher by US yields in 2019 and by the market pricing ECB rate hikes in 2020. We continue to see 10Y US Treasury yields at 3.30% on a 12M horizon. Unlike the situation in the European markets, we expect the 2Y10Y US yield curve to flatten further over the next twelve months.”