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In the US yesterday, government bond yields fell amid political uncertainty in Italy and the Fed signalling that a temporary modest overshooting of the 2% inflation target would be welcomed as it ‘would be consistent with the Committee s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations’, explains the research team at Danske Bank.

Key Quotes

“The FOMC minutes released yesterday also showed that the Fed discussed the recent flattening of the US yield curve. A few said that factors such as expectations of gradual Fed hikes, downward pressure on term premiums from the Fed’s still large balance sheet and other central banks’ asset purchases and investors’ lowered estimates of the long-run neutral rate could make the slope of the yield curve ‘ a less reliable signal of future economic activity. However, several said that it would be important to continually monitor the slope as historically, ‘ an inverted yield curve has indicated and increased risk of recession.”

“We expect the US yield curve flattening to remain a market theme and although we do not foresee an actual inversion of the US yield curve on a 12 month horizon, we expect the US yield curve flattening to continue.”