US yields: 10Y to hit 3.5% in three to six months - Danske Bank

Analysts at Danske Bank, still expected both higher 2Y and 10Y yields. They see the 10-year reaching the 3.5% target in the next six months. 

Key Quotes: 

“The Fed seems on track to deliver one more hike this year in December, which is also a consensus among analysts and priced by markets. Growth is strong, optimism is high, the unemployment rate is low, wage growth is increasing (although at a gradual pace) and core inflation is running near the 2% target. We also expect the Fed to continue hiking next year, as the expansion seems to continue but the committee is monitoring the yield curve, as many FOMC members are concerned about an inversion, which is considered a good recession indicator. We do not forecast an inversion.”

“We still see a case for both higher 2Y and 10Y yields. The short end is pushed higher, as our Fed rate path is not priced in the money market curve. In respect of the long end, a repricing of the US term premium is expected. We assume an effect on the yield level from the more expansive US fiscal policy, which has boosted US bond supply. The move in the USD FX forwards has made FX hedging of USD assets very expensive and it is more attractive to buy EUR or even JPY denominated bonds than US bonds despite the higher yield level. Hence, we keep our 3.5% target for the 10Y US treasury yield unchanged. We expect that level to be reached in three to six months’ time.”