US yields lifted recently (0.75% to 0.95% for the ten years) partly in response to the news around the vaccines; markets will be closely watching the progress of the vaccines. Bill Evans, Chief Economist at Westpac, has raised his US 10-year Treasuries forecast and expects the yield curve to steepen in the next year.
“Our forecasts have been for a fairly ‘steady’ profile for US Treasuries through 2021 as markets were uncertain about the recovery outlook in the face of competing ‘forces’ – prospects of a vaccine and the sharp lift in case loads. These earlier and more convincing than expected results on the vaccines (with others still actively developing their Stage 3 testing), in our view, point to markets favouring the improving vaccine outlook over the immediate threat from rising case-loads. And as we move through 2021 that dynamic will become more apparent.”
“Up till now our forecast profile for US 10 year Treasuries through 2021 had been to remain in a 0.65% – 0.75% range through to the end of the year, before lifting to 1.1% through 2022. We have now brought that rate profile in 2022 forward to 2021 with the 10-year bond rate rising from 0.80% in December through to 1.2% by end-2021. We accept that the Federal Reserve may remain active in the QE space through 2021 but feel that the optimism associated with the successful distribution of vaccines through 2021 will be the dominant market force while providing the Fed with some scope to ease back on support.”
“The RBA is projected to hold around 17% of the bonds on issue when it completes its QE program by June next year. Compared to the US Federal Reserve (22% now) and RBNZ (36%, projected) the RBA’s share of outstanding AGS is modest; the prospect that the RBA will extend its QE program beyond June seems realistic although we expect that AUD bonds will continue to trade at a slight premium over USD bonds. Consequently, the expected rise in US bond rates can be expected to lift AUD bond rates, steepening the yield curve.”
“Despite lifting our long bond forecasts we remain comfortable with the estimated timing of the revision to the three-year bond rate target remaining at around mid–2022, but markets may be less patient.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.