With low inflation expectations and a negative neutral real interest rate, current short and long yields are, in reality, not particularly low point out Dankse Bank analysts. They see there is no longer a gravitational or normalizing force that would tend to pull yields higher over time.
Key Quotes:
“There is no longer a trend inevitably pulling yields higher over time, and right now the economic cycle, in fact, points to lower yields rather than higher yields. Also, we are increasingly concerned that the trade war could dominate for a long time to come and that the US and China will not reach a solution – not even a truce.”
“We expect 10Y Bund and Treasury yields to fall further to minus 0.70% and 1.40%, respectively, in coming months, with risks on the downside. Risk appetite is set to be the primary determinant of yield levels on a 12M horizon. Risk appetite is currently low due to the trade conflict, and while we expect it to improve slightly over the next 12 months, yields are not likely to increase significantly and we definitely do not expect a change to an upward sloping trend in yields. After all, one swallow does not make a summer.”
“While we have become accustomed to low and falling (fluctuating) volatility in fixed income markets in recent years, the great uncertainty about the economy, risk appetite and monetary policy indicates we could see even bigger fluctuations for the remainder of 2019. 10Y Bund yields could be trading in a range of minus 0.8% to minus 0.2% on a 6M horizon.”
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