US bonds: We expect yields to move higher in a 12M horizon -  Danske

According to analysts from Danske Bank, US bond yields will move higher in a twelve month period and they expect the Federal Reserve to be very patient before raising rates.

Key Quotes:

“Following the increased uncertainty since the UK Brexit vote, the Fed has pushed the next hike further out. Fed members have increasingly highlighted a risk management approach in which the Fed puts higher weight on the risk of hiking too early than too late. An increased debate about a rethink of policy due to a lower neutral rate has also highlighted many Fed members’ change in view towards a more dovish stance.”

“We expect the Fed to be very patient before raising rates and look for the next hike in June 2017 and the following one in December 2017. However, markets have also adapted to a more dovish Fed stance and the next hike is not priced fully until December 2017.”

“US growth has recovered in Q2 pulled by very robust private consumption. Looking forward, we expect US growth to continue at cruising speed close to 2%. Downside risks to growth have decreased somewhat as the result of the Brexit referendum seems to be having a limited impact outside the UK but we still see the risks as mostly on the downside.”

“However, the Fed is likely to tolerate an overshoot, as some members have even talked about raising the inflation target to allow for a bigger buffer when the next downturn hits.”

“The global hunt for yield is still keeping a lid on longer dated US treasury yields, which is the only major market that offers a 10Y yield above 1.5%. Eventually, we believe the Fed will resume its hiking cycle, causing US yields to trend higher. We expect the move higher in US yields on a 12M horizon.”