- More strong US economic data has seen US 10-year bond yields spike to 3.2% this week – the highest level since 2011.
- Capital Economics says yields could edge higher in the first half of next year, as markets fully price in two more 2019 rate hikes by the US Fed.
- However, CE says yields will then go sharply into reverse as US growth stalls and the Fed moves back to accommodative monetary policy.
US bond yields are unlikely to rise much further this year, Capital Economics says.
And analyst John Higgins expects benchmark 10-year bond yields to finish 2019 back at 2.5% — around 70 basis points lower than their current level.
The selloff in US government bonds this week has reverberated through global markets. Bond yields in other major economies also rose sharply, while stocks fell and the US dollar strengthened.
Another round of strong US data on Wednesday night saw US 10-year yields rise sharply to the highest level since 2011. US 10-years are at 3.2% this morning — just off CE’s year-end forecast of 3.25%.
Last month, CE’s Oliver Jones predicted a “decisive” move in US bond yields, as markets moved to fully price in the prospect of more US Fed rate hikes in 2019.
However, Higgins said markets have now largely adopted the view that the Fed will hike rates again in December as the US economy heats up.
As a result, “we don’t think the yield will rise much further during 2018 than it has already,” he said. Still, US bond yields may continue to rise in the first half of next year.
“After all, we forecast that the Fed will raise rates by another 50 basis points during that period, which is nearly 15 basis points more than is discounted in the markets,” Higgins said.
After that though, Higgins said yields will fall — a view which again puts Capital Economics at odds with the broader market.
“Whereas investors expect the Fed to raise rates a little more then, we think the central bank will stop in its tracks amid signs that economic growth is slowing below its potential.”
By the second half of 2019, Capital Economics expects to see signs that the Fed’s current tightening cycle will begin to drag on the US economy.
So much so, Higgins forecasts benchmark yields will fall all the way to 2.5% — which implies that market expectations will shift back towards rate cuts.
“We suspect that the Fed will cut rates significantly in 2020 in order to try to prevent a recession,” Higgins said.
He conceded that a fall of more than 70 basis points sounds like a lot. But looking at recent history, Higgins noted that yields fell by 50 basis points when the Fed stopped its last tightening cycle in 2006.
“And this wasn’t followed by an easing cycle until the onset of the financial crisis,” Higgins said.
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