The pressure on long yields is set to ease as central bank rates and inflation approach a turning point, explained analysts at Danske Bank. They expect markets to increasingly price inflation to come under control, amid a deteriorating growth outlook. Therefore they continue to see yields peaking in 2022 (if they don’t have already in October) and long yields declining slightly in 2023.

Key Quotes: 

“10Y US Treasury yields last week briefly touched 4.30% and German Bunds 2.5%, meaning we had in fact passed our previous 3-month estimate. However, recent days have seen yields decline again, not least, following the ECB meeting. Hence, the big question is whether we have seen the peak in long yields for now.”

“We tentatively conclude that peak yield was probably reached in October and that long yields could retreat in 2023 as inflation expectations fall slightly and the anticipated recession unfolds. However, the trend is still likely to be up for central bank rates from both the ECB and the US Federal Reserve. In the coming months, we expect long yields to be particularly dependent on how inflation figures develop. We will also be keeping and ear open for announcements from the ECB about any upcoming halt to reinvestments (QT).”

“Much indicates we are now entering a period when the market is beginning to price a peak in inflation and at the same time beginning to glimpse the top of central bank rates. The ECB is expected to deliver its last rate hike in February and the Fed as early as December.”