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Analysts at Danske Bank expect US rates and yields to continue to tick up over the next three to six months as the economic recovery in the US gains speed, inflation expectations and real interest rates continue to rise and markets really begin to discuss the timing of Federal Reserve QE tapering.

Key Quotes:  

“Tapering the asset purchase programme should very soon be on the FOMC agenda. The Fed is currently purchasing USD120bn worth of Treasury and mortgage bonds every month. When bond purchases were tapered in 2014, the process took a year. This time, however, we expect tapering to proceed more quickly. Nor is it a given that at least a year will pass from QE ending to rates being raised, as was the case in 2014-15. We, therefore, believe that, sometime in summer 2021, the market will start pricing one or two rate hikes in H2 22.”

“We continue to expect long US yields to increase further. The big question is when that might happen. Our take from January and February is that fixed-income markets are in the vanguard at the moment, which means the yield increases we are penciling in for the US three to six months from now could very well materialize much sooner. This could happen, for example, if the Fed changing its tune as early as June becomes consensus.”  

“We have revised up our outlook on 10Y US yields. We now look for an increase to 1.85% (1.7%) and 2.0% (1.8%) in three and six months, respectively. Looking 12 months ahead, we expect a 10Y yield of 2.20% compared to 2.1% previously.”