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Analysts at Danske Bank, continue to see the 10Y treasury yields above the 3% level in 2019, as the labour market remains tight and the funding need continues to rise due to the expansive US fiscal policy. However, they expect the 2Y10Y curve to be very flat.

Key Quotes:  

“The Fed seems on track to deliver two more hikes this year (in September and December), which is also a consensus among analysts and priced by markets. Growth is strong, optimism is high, the unemployment rate is low, wage growth is increasing (although at a gradual pace) and core inflation is running near the 2% target. We also expect the Fed to continue hiking next year, as the expansion seems to continue but the committee is monitoring the yield curve, as many FOMC members are concerned about an inversion, which is considered a good recession indicator.”

“We still see a case for both higher 2Y and 10Y yields. The short end is pushed higher as our Fed rate path is not priced in the money market curve. In respect of the long end, a modest repricing of the US term premium is expected. We also assume an effect on the yield level from the more expansive US fiscal policy, which has boosted US bond supply.”

“We do not forecast an inversion of the 2Y10Y curve in treasuries on a 12M horizon, as we expect the market to price a very flat to inverted money market curve keeping 2Y yields in check after all. However, the curve is set to be very flat and we should expect a lively discussion whether this is a signal of a new US recession getting closer. “

“We expect 10Y US Treasury yields to reach 3.25% on a 12M horizon. We expect the curve 2Y10Y to flatten to just 10bp in 2019 and believe temporary inversions throughout 2019 are likely.”

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