US: 10-year yield to reach 3.30% in 12M - Danske Bank

The boost to fiscal policy in the US and the possible pricing of more rate hikes in the US are the main reasons why analysts at Danske Bank see more upside for US 10Y yields. They expect the 10Y to reach 3.3% in 12 months. 

Key Quotes: 

“We expect the Fed to hike twice more this year with risk skewed toward a third hike. This was also the message the Fed sent at its March meeting, where the median dot was unchanged at three this year but underlying details showed the committee was divided between a total of three and four hikes this year.”

“In line with our expectation, the Fed also signalled it is ready to start hitting the brakes soon, as the committee now signals it is ready to raise the Fed funds rate above the longer run dot of 2.875% (which is the Fed’s estimate of the natural rate of interest where monetary policy is neither expansionary nor contractionary). We expect three additional hikes next year and that it is possibly the hiking cycle will continue into 2020. We still think the markets are pricing the Fed too dovishly over the coming years.”

“We still see a case for a Fed repricing in 2019/20, pushing 2Y yields higher. We continue to expect a flattening of the curve for the 2Y10Y on a 12M horizon. However, we still see the 10Y US treasury yield at 3.30% in 12M, as we see a further repricing of the US term premium given the risk of higher interest rate volatility and as we see an effect from the more expansive US fiscal policy going forward, which will boost US bond supply.”