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Rising inflation expectations and higher real interest rates are pushing US yields up. Economists at Danske Bank expect higher long-term US yields, but mainly in the second half of the year.

Key quotes

“We expect US rates and yields to continue to tick up in H2 21 as the US recovery gains speed, inflation expectations and real interest rates continue to rise and markets really begin to discuss the timing of Fed QE tapering. 10Y US yields look set to hit 2.1% by the end of 2021.”

“The markets are likely to reprice the Fed, pricing earlier and a larger number of policy rate hikes, putting further upward pressure on 5Y US yields. We expect no US rate hikes for the next two years, but the market could well begin to speculate with a vengeance in the Fed hiking as early as 2022.”    

“We expect the ECB to be able to keep 10Y German yields close to current levels for the next couple of months. However, higher US yields and expectations of reduced QE buying from the ECB in 2022 are likely to push long-term European yields up from late summer. We expect 10Y German yields to return to positive territory at 0.1% by the end of 2021.”

“The US-Germany yield spread is likely to widen to at least 200bp, making it attractive for European investors to buy US bonds, both FX hedged and unhedged. That should help suppress long US yields while increasing the upside to long German yields. The ECB’s apparent tacit acceptance of higher long yields will probably add to the upside risk to long German yields in coming months.”