Yield Outlook – Here in Q4, central banks will set the direction for 2018

New research from Danske Bank

In the past few editions of Yield Outlook, we have argued that bond yields (represented by 10Y US Treasuries and German Bunds) are likely to range trade through 2017. This is still our view.

That said, we still think markets are pricing in too few hikes in the US next year (only one additional hike). If our baseline scenario is correct, it should tend to push US yields slightly higher in 2018. We have a 12M forecast of 2.70% for 10Y US Treasury yields. We continue to expect a flattening of the US 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.

In Germany, on the other hand, we expect a modestly steeper yield curve for the 2Y10Y in 2018. The ECB maintains a tight grip on the short end of the curve also in 2018. However, this is not the case for the 10Y segment of the curve, which we expect to be pushed by higher US yields and a smaller QE programme. We have a 12M 0.75% forecast for 10Y Germany.

Yield Outlook  Here in Q4, central banks will set the direction for 2018

Yours faithfully

Danske Bank

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