US Interest Rates: Further flattening ahead  - Wells Fargo

Analysts from Wells Fargo, expect the yield curve to flatten further and they see that short-term rates will likely move higher next year. 

Key Quotes: 

“Our forecast for the U.S. economy does not call for a recession over the next two years, but we do expect the yield curve to flatten further. The FOMC is widely expected to hike rates again in December, with the current market probability above 90 percent. There is less of a consensus for 2018, with the median estimate from the FOMC projecting three hikes next year and markets currently penciling in only one hike. We take a middle view and anticipate two rate increases next year, but the bottom line is that short-term rates will likely move higher next year.”

“Longer-term rates should also rise as U.S. growth strengthens, but we expect to see further curve flattening. The slow pace of Fed tightening from what are already low levels of rates may continue to push some investors to extend duration. At the same time, low interest rates around the world continue to make U.S. Treasuries look relatively attractive. Foreign net purchases of long-term Treasuries have on average been positive this year. A third factor limiting the rise in longer-term Treasury rates is the persistence of low inflation, leading investors to demand lower inflation compensation.

“While the yield curve is expected to flatten further on trend in the coming months, a significantly wide federal deficit and/or pickup in inflation could upset the pace and degree of flattening.”