US to witness 10 y USTs ending 2017 at 1.75% - Rabobank

Analysts at Rabobank notes that the FOMC fulfilled wide held expectations yesterday evening by hiking the Fed Funds rate by 25 basis points.

Key Quotes

“In a unanimous decision, the FOMC raised the target range for the federal funds rate to 0.50-0.75% from 0.25-0.50%, though it was arguably the accompanying statement and the shift in the Fed’s dot plot which revealed a more hawkish lean from the Fed in 2017, this applying upward pressure (c.a. 13 bps) to 10 y UST yields.”

“Specifically, the FOMC’s dot plot revealed participants now expect three instead of two hikes in 2017 (this compared to the September projections), while they continued to project three hikes for both 2018 and 2019. The median ‘longer rate’ projection, meanwhile, was also revised slightly upward to 3.0% from 2.9% which implies that the Committee expects to end its hiking cycle somewhat earlier in 2020.”

“Our own take on this notion of Trump-dependency is important as regards our outlook for US rates in 2017. Philip notes that we remain sceptical of the suggested three hikes next year and reiterate Philip’s point that it is important to keep in mind the Fed expected four hikes for 2016 back in December of last year. We have not only seen just one hike in 2016, we have seen an adjustment in the outlook that is being influenced by a President that may indeed have a great deal more trouble in actually delivering the major infrastructure and investment plans that helped propel him to the oval office.”

“We suspect the market will be inclined to “buy the rumour” of a Trump administration until policy clarity is achieved which will continue to see higher yields and a steeper curve as proving the near term path of least resistance. Over the long-run, though, our scepticism that Mr Trump will be able to push through his bold fiscal plans, our doubts that his presidency will see labour’s bargaining power improve, the fact that trade barriers could see a loss of external demand offsetting any potential fiscal growth impulse and the higher risk an isolationist US represents in terms of geopolitical tension will serve to see a bullish flattening of the curve next year. On that front, Philip maintains his expectation for just one hike from the Fed in December of next year and we see 10 y USTs ending 2017 at 1.75% after rising to 2.50% in Q1 of next year.”