Since our last issue of Yield Forecast Update, we have seen a pronounced rise in yields both in Europe and in the US and we have seen a clear steepening of the curve 2Y10Y and 5Y10Y. However, it is important to underline that the tendency towards steeper curves and higher yields started before the US election.
Following the very short-lived, initial sell-off in the financial markets when it became clear that Donald Trump was winning the presidential election, FI markets suffered. Markets seem to have bought into the story that Trump will boost growth through infrastructure spending and tax cuts, which has led to higher inflation expectations, higher US yields and a repricing of Fed hikes. A new term has been coined for this line of thinking: Trumpflation.
Markets have more or less fully priced in a Fed hike in December and more than two hikes from now until year-end 2017 - before the election, markets priced in only one and a half Fed hikes. Ten-year US treasuries are now trading at 2.2%, the highest level since year-end 2015 and the US 5Y5Y inflation expectation has risen to 2.4%.
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