UST yields: Respecting the range – Standard Chartered

John Davies, US Rates Strategist at Standard Chartered, explains that after a temporary safe-haven bid in April, the 10Y yield is now back in its previous 2.30-2.65% range and they believe this range will continue to dominate in the near term and adjust our forecasts accordingly.

Key Quotes

“We adjusted our near-term US Treasury (UST) duration stance to Neutral from Negative in late January, arguing that a 2.30-2.65% range was likely for the 10Y yield. In mid-April, the 10Y yield fell through the bottom of that range and the market-implied probability of a June rate hike dipped below 50%. However, we took the view that the move reflected a temporary safe-haven bid due to heightened geopolitical uncertainty. As that geopolitical uncertainty faded, the 10Y yield rebounded above 2.30% and a June hike is now priced in with around 80% probability. Nevertheless, we still doubt that the 10Y yield will chart new highs in the near term.”

“The Trump administration has apparently made little progress on its fiscal stimulus plans based on its much-heralded but extremely brief tax-reform outline. Moreover, the difficult passage through Congress of the recent spending bill and the American Health Care Act – which still requires Senate approval – suggests that Trump will struggle to implement his stimulus plans once finalised. We therefore think the Trump reflation trade will remain on hold in the near term, while greater detail concerning Fed balance sheet-reduction plans are unlikely to emerge until well into Q3.”

“Hence, we lower our 10Y yield forecast for end-Q2 to 2.50% from 2.75%, and for end-Q3 to 2.75% from 3%. We still think that renewed fiscal stimulus speculation plus the announcement we expect from the Fed in December that it will allow its balance sheet to start shrinking in 2018, will push the 10Y yield to around 3% by year-end.”