Danske Bank Research: Yields set to rise further in Autumn, US 10-year to hit 2.1% By Investing.com

By Samuel Indyk

Investing.com – Analysts at Danske Bank have said they expect yields to rise further in the Autumn after economies begin to reopen amid the increase in vaccinations.

In their Yield Outlook research note, Danske argues that US rates and yields will continue to tick up in H2 as the recovery gains speed, inflation expectations and real interest rates continue to rise and markets begin to really discuss the timing of Fed QE tapering.

Why are yields rising right now?

Back in mid-February, Danske argued that long yields were set for a significant increase, particularly in the US. However, the increase in US and Germany yields that they expected on a 3-6 month horizon has happened in less than three weeks.

The United States 10-Year yield has increased by circa half a percentage point since early February and the Germany 10-Year is up by around a quarter of a percentage point in the same timeframe.

So, why has this happened? Danske argues that in the eyes of the markets, economies have already reopened.

“The combination of the vaccine rollout and spring coming in the northern hemisphere means fears of an extended lockdown over the summer and into autumn have evaporated,” Danske says. “The effect of the vaccines on new infection numbers and hospital admissions can be clearly seen in Israel and the UK, which are leading the vaccine rollout.”

Further supporting the rise in yields is the larger than expected US stimulus package, which is currently passing through Congress. The $1,400 stimulus checks as part of the package “is likely to give the service industry a much appreciated kick-start now that the US economy is opening for real.”

Inflation expectations also keep rising, supported by higher commodities prices and supply shortages in certain sectors, such as semiconductors and computer chips.

“US inflation expectations have surged over the past three or four months after collapsing a year ago,” Danske notes. “10Y inflation expectations as indicated by bond markets (breakevens) have now reached 2.25% – their highest level since 2014.”

Yield Forecasts

Danske sees US yields rising, with particular upside risk in the 5-year segment.

“All in all, we expect 5-year Treasury yields to rise from around 0.85% to 1.20% in 2021, while 10-year yields are likely to rise from the current 1.60% to 2.1% by the end of the year.”

With US yields jumping, Danske analysts expect Bund yields to follow suit.

“Overall, we expect the combination of higher US yields and markets pricing less ECB QE in 2022 to cause 10Y Bund yields to end the year at 0.1%,” the bank says. For context, the German 10-year yield has not been positive since May 2019.