We have been arguing for a while that for the rest of 2017 we should expect range trading in most fixed income markets. We keep this view unchanged in this issue of Yield Outlook. But importantly we stress that the risks are increasingly skewed to the upside for both US and EU yields.
In the eurozone all eyes will be on the ECB and the possible extension of the QE programme into 2018. We still argue that the ECB will 'be forced' due to low inflation to continue its ECB purchases in H1 2018 - albeit at a reduced pace of EUR40bn a month. We expect a QE announcement at the October ECB meeting. But the risk is once again asymmetric. The ECB might put more weight on the better economic data and argue that an extension of the QE programme is unnecessary.
Another unknown is the Fed. Despite low inflation, we maintain our call that the Fed will make an announcement on quantitative tightening (reducing its bond portfolio) at the next meeting in September and hike for the third time this year in December and again over the summer next year. Our Fed forecast is more hawkish than the market has priced.
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