US: Yields will continue to move higher - Danske

According to analysts from Danske Bank, US yields will continue to move higher over the next three to six months, based on four pillars: the macroeconomic backdrop that is still constructive, the Fed on autopilot until June 2019, higher US term premium and real ‘market’ rates moving higher. 

Key Quotes: 

“The US bond market has been setting the direction in global bond markets over the past two weeks. Since the beginning of September, 10Y US Treasury yields have jumped more than 30bp to currently 3.16%. The move higher in yields has been especially noteworthy given the poor performance for global equity markets in the same period.”

“Even after the recent move higher in US yields we still have upside potential and accordingly we have changed our forecast for 10Y US yields, which we now expect to hit 3.30% (3.05%), 3.50% (3.20%) and 3.50% (3.50%) on a 3, 6 and 12 month horizon.”

“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 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 into the money market curve. In respect of the long end, a repricing of the US term premium is expected.”

“We still expect the Fed to raise the Fed funds rate above the longer run dot of 3.0% (the Fed’s estimate of the natural rate of interest when the economy is normalised) in coming years. We see a peak at 3.25% in 2020.”