Yields to edge higher again at the end of 2021 and in 2022 – Danske Bank

Yields made a U-turn in the second quarter, with US 10Y yields falling around 30bp. This trend has continued over summer and US 10Y yields are now down 50bp from their early April peak. Eurozone yields have also declined quite a lot. However, yields are set to tick up later in 2021 as the US labour market improves and the Fed starts tapering, according to economists at Danske Bank.

10-year US Treasury yields still set to move higher 

“We expect US rates and yields to increase late in 2021 as growth really spreads to the labour market and the Fed starts tapering its asset purchases. The US 10Y yield will probably hit 1.7% (previous forecast: 2.0 %) by the end of 2021 and 2% (2.2 %) on a 12M horizon.”

“In the coming months markets are likely to focus on 1) whether inflation is actually temporary, 2) whether the economic cycle and growth have topped, 3) whether the Delta variant prompts further hospitalisations and restrictions and 4) whether the US labour market improves, which is a focus for the Federal Reserve. Hence, we expect range trading in coming months – with a slight upside risk to both European and US long yields.”

“We no longer expect markets to price early rate hikes from the ECB – not even as the first US rate hikes move very close. We have therefore lowered our forecast for eurozone 5Y yields for the next 12 months, which also feeds into our 10Y yield outlook for the eurozone. We now expect the German 10Y yield to increase to -0.25% (0.0 %) by the end of 2021 and to 0.1% (0.3 %) 12 months from now.”