8 Jan 2015
Waning demand for US treasuries will allow rates to normalize higher – BAML
FXStreet (Barcelona) - The Research Team at Bank of America-Merrill Lynch, maintain their view that for longer maturity rates to rise as waning demand for treasuries might allow a higher normalization rates, and further forecast 10y rates to jump to 2.75% at 2015-end.
Key Quotes
“The theme of global growth remains the dominant issue for our US rates forecast. While growth in the US gained momentum, up 5% in 3Q, growth in the Eurozone was 0.8% and in Japan was -1.9%. China is also slowing with 3Q growth at 7.3% versus 7.7% on average for 2013. Whether or not this divergence continues is a key question for the months ahead, but given the recent declines in rates globally it is clear that some degree of recoupling is occurring within the bond markets.”
“Perhaps the most important theme for the coming quarter will be to what extent improving US fundamentals allow US rates to rise and the Fed to continue on its expected course of tighter monetary policy later this year.”
“Our base case scenario is that economic divergence will continue and that waning demand for Treasuries from price insensitive investors (the Federal Reserve and banks who still need to increase their liquidity portfolios) will allow rates to normalize higher. But recoupling risks appear to be growing.”
“Our forecast for 10y rates at the end of 2015 remains at 2.75%. We still expect the first Fed hike to occur in September 2015. And we maintain our view that longer maturity rates could rise more than shorter maturities leading to a steeping of the yield curve.”
Key Quotes
“The theme of global growth remains the dominant issue for our US rates forecast. While growth in the US gained momentum, up 5% in 3Q, growth in the Eurozone was 0.8% and in Japan was -1.9%. China is also slowing with 3Q growth at 7.3% versus 7.7% on average for 2013. Whether or not this divergence continues is a key question for the months ahead, but given the recent declines in rates globally it is clear that some degree of recoupling is occurring within the bond markets.”
“Perhaps the most important theme for the coming quarter will be to what extent improving US fundamentals allow US rates to rise and the Fed to continue on its expected course of tighter monetary policy later this year.”
“Our base case scenario is that economic divergence will continue and that waning demand for Treasuries from price insensitive investors (the Federal Reserve and banks who still need to increase their liquidity portfolios) will allow rates to normalize higher. But recoupling risks appear to be growing.”
“Our forecast for 10y rates at the end of 2015 remains at 2.75%. We still expect the first Fed hike to occur in September 2015. And we maintain our view that longer maturity rates could rise more than shorter maturities leading to a steeping of the yield curve.”