Fed: US 10-year yields to edge higher as tapering set to begin in Q4 – Danske Bank

The Federal Reserve is in the process of preparing the market for a tapering decision in the near future. Economists at Danske Bank do not expect a firm tapering announcement before the September FOMC but tapering will of course be discussed at the upcoming Jackson Hole conference. They expect that tapering will be concluded in summer 2022 followed by a rate hike late in 2022.

Market impact of tapering

“We expect that the Fed will announce tapering at the September FOMC meeting and that tapering will actually begin in Q4. We expect that tapering will be concluded in summer 2022 followed by a rate hike late 2022.”

“Although a tapering announcement this autumn should be no major surprise to the market, we argue that the recent curve flattening is too early in the cycle. We still have a bond market that has to adapt to significantly lower QE purchases in 2022 and the first rate hike is also in our view moving closer in time.”

“We do see some upside for US yields in Q4 and in 2022. We also assume that a further improvement in the US labour market and a repricing of the current very low real rates will add upside to US 10Y yields. That said, the fear of a ‘peak’ in inflation and growth are factors that point to stable or even lower yields/flatter curves.”

“We acknowledge that some of the same factors that resulted in the ‘bond yield conundrum’ in 2014 are now at play. This time the big bond buyer might not necessarily be Asia but Europe. The new ECB strategy and adoption thereof by the governing council indicates that the ECB repo rate will stay at the current level for many years and keep the curve 2s10s relatively flat in the EGB space.”