US 10-year yield forecast at 2.70% in 12M - Danske Bank

Analysts from Danske Bank still think markets are pricing in too few hikes in the US next year (only one additional hike on top of the widely expected December 2017 hike). They maintain a 12M forecast of 2.70% for the 10Y US Treasury yield. 

Key Quotes: 

“The Fed has announced that it has begun the process of shrinking the balance sheet (‘quantitative tightening’), while still signalling another Fed hike this year, likely to be in December. It remains our base case that the Fed will hike in December, as the core voting FOMC members put more weight on labour market data than on current inflation data.”

“Jerome H. Powell has now been nominated to succeed Janet Yellen as Fed Chair. Powell is considered to be in the same ‘neutral’ rate camp as Yellen. Hence, we believe he will vote for two rates hikes in 2018 if the economy evolves as expected.”

“The markets now price in a relatively high probability of a December hike of 90%, which seems much fairer, in our view, than a few months ago when the market priced in a small probability of a hike. However, we still think markets are pricing in too few hikes next year (only one additional hike). If our baseline scenario is correct, it should push US yields slightly higher. However, we do not see a major sell-off this year. We continue to expect a flattening of the curve for the 2Y10Y on a 12M horizon. We believe the short end could be pushed higher by Fed rate hikes, while the long end could be kept low by investors buying ‘high yielding’ US fixed income assets.”