Bond sell-off pause might soon be over – Danske Bank

According to analysts at Danske Bank, the confirmation that growth is not falling off a cliff and that indicators are about to stabilise would take away yet another support factor for global bonds. They add cyclical outlook points to a continuation of the development of the past four months, which has supported higher yields. They see yields are set to rise further and the curve to steepen in 2020.

Key Quotes: 

“In 2020, we forecast a new leg higher in global 10Y yields following the recent Q4 rise in longer dated yields. We expect 10Y Germany to move back into positive territory in the second part of 2020 and 10Y US treasury yields to move back above 2%. In respect of the curve 2s10s, we expect the German and EUR swap curves to steepen some 20bp in 2020, as safe-haven buying dries out in the wake of better risk appetite and a better cyclical outlook. We forecast the 10Y term premium in Germany will become positive again, adding to the steepening pressure in 2020.”

“For global yields, 2020 confirmation that growth is not falling off a cliff and that indicators are about to stabilise would take away yet another support factor for global bonds. Hence, the cyclical outlook points to a continuation of the development that past four months, which has supported higher yields.”

“We expect German yields to stabilise around the current level after the recent Q4 rise. However, we continue to see 10Y bund yields higher on a six to 12 month horizon, as we expect the cyclical outlook to improve in the second part of 2020 and as the termpremium moves higher. We expect 10Y Bund and 10Y Treasury yields to hit 0.1% and 2.1%, respectively, in H2 20. The risk is now seen on the upside compared with our forecasts.”

“Our forecasts also imply that we expect the curve 2s10s to steepen in 2020. We expect the German bond curve to steepen from 40bp currently to 60bp and the 2s10s EUR swap curve to steepen from 50bp to 70bp.”