US yields: range trade for next three to six months, then higher - Danske Bank

According to analysts from Danske Bank, in the US bond market, not only Federal Reserve rate hikes but also a possible change in their reinvestment policy will set the direction for yields. They see slightly higher US yields on a six-month horizon and consider that higher yields are mainly a 2018 story.

Key Quotes: 

“The next uncertainty is whether or not the Fed will hike in June. While this is consensus among analysts and is 70% priced in by markets, we are more sceptical given the weaker economic data and weak inflation prints. It is not because we expect the Fed to pause its hiking cycle but we expect the Fed to wait until July and instead take the opportunity to announce the triggers in June for starting the reduction of its balance sheet (‘quantitative tightening’). That said, we will have to listen carefully to the upcoming Fed speeches for more information about the different views among FOMC members, which should reveal whether or not we are mistaken.”

“Besides a summer hike, we expect the Fed to hike again in December and three to four times next year (depending on the Fed’s strategy for quantitative tightening). Markets have priced in a total of 2.7 hikes from now until year-end 2018.”

“We forecast that US yields will mostly range trade over the next three to six months, before moving higher again on a 12M horizon. We expect US 10Y Treasury yields to trade at 3% in 12M.”