U.S. Treasury rates to rise and curves to steepen in 2021 - Westpac

FXStreet reports that U.S. yields lifted recently (0.75% to 0.95% for the ten years) partly in response to the news around the vaccines; markets will be closely watching the progress of the vaccines. Bill Evans, Chief Economist at Westpac, has raised his US 10-year Treasuries forecast and expects the yield curve to steepen in the next year.

“Up till now our forecast profile for US 10 year Treasuries through 2021 had been to remain in a 0.65% – 0.75% range through to the end of the year, before lifting to 1.1% through 2022. We have now brought that rate profile in 2022 forward to 2021 with the 10-year bond rate rising from 0.80% in December through to 1.2% by end-2021. We accept that the Federal Reserve may remain active in the QE space through 2021 but feel that the optimism associated with the successful distribution of vaccines through 2021 will be the dominant market force while providing the Fed with some scope to ease back on support.”

“The RBA is projected to hold around 17% of the bonds on issue when it completes its QE program by June next year. Compared to the US Federal Reserve (22% now) and RBNZ (36%, projected) the RBA’s share of outstanding AGS is modest; the prospect that the RBA will extend its QE program beyond June seems realistic although we expect that AUD bonds will continue to trade at a slight premium over USD bonds. Consequently, the expected rise in US bond rates can be expected to lift AUD bond rates, steepening the yield curve.”

“Despite lifting our long bond forecasts we remain comfortable with the estimated timing of the revision to the three-year bond rate target remaining at around mid–2022, but markets may be less patient.”