Analysts from Danske Bank, see government bond yields moving to the upside, amid rising inflation expectations, though probably not until 2021. They do not believe the abrupt fall in US real yields is due to the coronavirus outbreak.
Key Quotes:
“Swap and government bond markets have taken a different course. One would normally expect yields in key markets to rise when risk appetite is strong. This increases expectations of central banks normalising monetary policy and investors would be likely to drop safe assets. However, long yields have not increased much as appetite has strengthened and the US 10Y yield fell to a record low 0.5% at the beginning of August.”
“Markets believe that inflation is set to normalise and are pricing a reflation of the economy. Indeed, several economies saw inflation numbers for July surprise on the upside.”
“Yields and inflation expectations would move in the same direction. The development in inflation expectations and nominal yields has prompted a quite significant fall in expected 10Y US real yields to -1%.”
“We do not believe the abrupt fall in US real yields is due to the coronavirus outbreak and we expect US real yields to tick up in 2021, driven mainly by higher nominal yields. Real yields have also declined in Germany, though generally to the levels of H2 19. According to most estimates, the German/eurozone neutral real yield is zero or negative.”
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