Market still priced too soft in US - flatter 2Y10Y curve in USD
We 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).
If our baseline scenario is correct, it should push US yields slightly higher in 2018. We maintain our 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.
Modest steepening of the 2Y10Y curve in Germany is our main case
In Germany, we expect a modestly steeper yield curve for the 2Y10Y in 2018. We expect the ECB to maintain a tight grip on the short end of the curve 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.
However, we may be underestimating the downward pressure on 10Y yields in Germany from the continued ECB purchases, which now include a growing amount of reinvestment from bonds maturing. The healthy German economy also implies that the funding need - and henceforth bond issuance - for Germany will be modest in 2018.
To read the entire report Please click on the pdf File Below: