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Analysts at Danske Bank see the 10Y US Treasury yield at 3.30% in a 12 month horizon and they expect the US curve 2y10y to flatten further over the next twelve months.

Key Quotes:

“We expect the Fed to hike twice more this year with risk skewed towards a third hike. This was also the message the Fed sent at its March meeting, when the median dot was unchanged at three this year but underlying details showed the committee was divided between a total of three and four hikes this year. As the economic expansion continues, it is still the subdued inflation and wage growth that will be key determinant for the hiking pace. Note the Fed put more focus on the modest inflation at its’ latest policy meeting.”

“In line with our expectation, the Fed also signalled it is ready to start hitting the brakes soon, as the committee now signals it is ready to raise the Fed funds rate above the longer run dot of 2.875% (which is the Fed’s estimate of the natural rate of interest where monetary policy is neither expansionary nor contractionary). We expect three additional hikes next year and believe that it is possibly the hiking cycle will continue into 2020.”

“We still see a case for a Fed repricing in 2019/20, pushing 2Y yields higher. We continue to expect a flattening of the curve for the 2Y10Y on a 12M horizon. However, we still see the 10Y US treasury yield at 3.30% in 12M, as we see a further repricing of the US term premium given the risk of higher interest rate volatility and as we expect an effect from the more expansive US fiscal policy going forward, which would boost US bond supply.”