Economists at Danske Bank expect US rates and yields to continue to tick up over the next 3-6 months as the US recovery gains speed, inflation expectations and real interest rates continue to rise and markets really begin to discuss the timing of Fed QE tapering.

Higher inflation expectations still a possibility

“We estimate the increases in commodity prices already seen will come to have a significant impact on the current rate of inflation, especially in the US.”

“We would not be surprised if by June the dots would begin to indicate a majority of the 19 FOMC members contributing dots targeting higher interest rates in 2023. Seven members currently say 2023 and three 2022. [...] We expect the Fed to officially kick off discussions about tapering QE at its September meeting.”

“Unsurprisingly, inflation expectations in the markets have ticked up in 2021, with 10-year inflation expectations in the US rising by around 0.5 percentage points this year to now stand at 2.5%.”

“10Y US yields look set to hit 2.0% on a 6M horizon and 2.2% 12 months from now. While we expect no US rate hikes for the next two years, the market could probably begin to speculate with a vengeance in the Fed starting to hike as early as H2 22.”

 

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