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With the emergence of the coronavirus, markets have moved back to last year’s mindset – concerned about what bad news lies around the corner. As a result, there is limited upside room in the treasury yields, according to ANZ analysts. 

The bank now sees the US 10-year treasury yield rising to 2% by late 2020 compared to the previous forecast of 2.25%. 

Key quotes

The news flow around the virus is likely to dictate near-term moves. Given the uncertainty, we have penciled an end-Q1 forecast of 1.5% for 10y Treasury yields.

With the US economy doing reasonably well itself, it would take a very sharp and sustained slowdown in China’s demand for concerns about a US recession to rise
again. This can’t be ruled out, of course. 

We envisage that USD rates will move higher in the second half of the year, as the outbreak is contained and the recovery from the demand shock gains momentum.
Even with this, we don’t have yields peaking at the same level as in our previous forecast round (2.25% for 10y UST).

At press time, the 10-year yield is seen at 1.526% – down over 40 basis points from the high of 1.95% observed at the end of December 2019.