Real interest rates to rise in coming quarters – Danske Bank

Analysts at Danske Bank expect renewed upward pressure on long-term yields, with 10Y US Treasury yields set to hit 2% within the next 6-12 months. They continue to expect 10Y German Bund yields to edge up to 0.25% in 2022.

Key Quotes: 

“We expect 2Y US yields to rise in the coming 12 months as rate hikes approach. That would tend to flatten the curve. However, we can also see from the right-hand chart above that 10Y yields normally increase at the same time. In other words, we usually see the entire yield curve shift upwards when the curve flattens due to policy tightening.”

“We have a 2% target for 10Y Treasury yields and a 0.25% target for 10Y Bund yields. Hence, we expect higher 10Y US yields to push long European yields up.”

“We also expect real interest rates to rise in coming quarters. 10Y real interest rates have declined further this autumn. While inflation expectations (break-evens) in fixed-income markets have risen, nominal 10Y yields have remained broadly flat, sending real interest rates lower. We expect real interest rates to start increasing again in 2022, putting upward pressure on long nominal yields.”