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Yields set to fall back again – Danske Bank

Analysts at Danske Bank point out markets not sending yields up much despite the positive news about the trade war and Brexit looks like the right thing to do because the underlying Eurozone macro economy has remained quite weak and the monetary stimulus from the European Central Bank should not be underestimated and also the “market has lost faith in higher inflation.”

Key Quotes:  

“We expect German yields broadly to fall back to August levels and we maintain our call that the benchmark German bond yield is likely to fall to minus 0.60% within the next three months. The combination of a weakening economic cycle, ECB QE, the failure by Europe to apply fiscal policies and low inflation expectations among investors points in that direction.”

“The US Federal Reserve has already cut rates and while Governor Jerome Powell was very cautious about promising a string of rate cuts, we now believe we will see a series of US rate cuts and that the Fed funds rate will fall to 1% by March 2020.”

“Given our Fed call, we expect 10Y US Treasury yields to decline to 1.1% on a six-month horizon. This would help put downward pressure on long-term European yields. European yields in particular have been under heavy pressure due to the weak economic cycle 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.”

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