According to analysts from Danske Bank, the Federal Reserve opened the door to a yield curve control. They see some upside risks in long term US yields over the next six to twelve months.
Key Quotes:
“The Federal Reserve has taken an even more aggressive approach to QE than the ECB, which is open ended. At its meeting last week, the Fed confirmed that it intends to continue buying bonds at the current pace. As such, we expect the Fed to continue buying around USD80bn worth of US Treasuries and USD45bn worth of US mortgage-backed securities per month. While US yields – like their European counterparts – have increased over the past month, the question is whether this has happened a tad too fast and whether we could be set for a modest decline in yields in the next couple of months. Firstly, risk markets could be hit by profit taking.”
“Powell touched on the question of yield curve control (YCC) at the press conference. The Fed is considering the possibility of not only targeting very short rates but also medium-term maturities, i.e. 2Y-3Y rates (unlike the Bank of Japan, which is targeting 10Y yields). Implementing YCC, for example, keeping 3Y rates close to zero, would testify to the Fed’s commitment to keeping policy rates at current levels. The Fed would probably not need to buy a significant volume of short-term bonds, given current economic conditions. As such, QE could focus on longer-term yields and, not least, the mortgage market, securing cheap funding for American households. However, with a gradual US economic recovery set to take off in H2 20, we do not expect the Fed to implement YCC.”
“That is why we continue to see some upside to long-term US yields on a 6M-12M horizon. We still expect 10Y US Treasury yields to increase to 1.1% 12 months from now. In our view, the latest jobs report confirmed that the healing of the US economy is well underway.”
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