US 10Y yields and rate to fall further over the next three months

Analysts at Danske Bank argue that 10Y US treasury yields will fall to 0.50% over the next couple of month, as the economy stays under pressure and Federal Reserve’s QE program supports the bond market strongly. On a six to twelve month horizon, they expect yields to move slowly higher.

Key Quotes:

“We argue that 10Y US treasury yields and swap rates will edge lower towards 0.50% over the next couple of months, as the economy remains under pressure and Fed QE supports the bond market. However, on a 6M to 12M horizon, we expect yields to move higher once again as the economy improves, allowing the Fed to slow down the QE programme somewhat. We have a 0.8% and 1.0% target on 6M and 12M horizons, respectively.”

“Our forecast is that the combination of hefty QE and the deepening recession will keep downward pressure on 10Y US yields over the next three months and that the elevated 3M USD Libor will start to drift lower. Hence, we have a 3M forecast for 10Y Treasury yields and 10Y USD swap to 0.60%. We assume a flat swap spread. However, on 6M and 12M horizons, we see renewed upward pressure. Supply kicks in, the economy is improving and the Fed might accept yields edging higher. We pencil in 0.8% and 0.9%, respectively.”

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