We stress that risks to our newly updated yield forecasts are that the drivers we see for higher yields in 2018 materialise much earlier than we forecast. This is especially the case for the US fixed income market.
First of all, our business cycle model, Macroscope, is predicting that the US economy will re-accelerate in the coming months. This is contrary to market consensus.
Secondly, we are in a situation where the market is positioned for lower yields. When the market is caught wrong-footed it often leads to exaggerated moves.
Thirdly, the market has flattened the US money market curve and has only priced a 40% probability of a new rate hike this. We think the market underestimates the risk of a December rate hike.
The 5y point of the US curve is most exposed.
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