We have lowered our 12M forecast for German 10Y yields slightly from 1.20% to 1.1% due to the change in the ECB deposit rate forecast. We continue to see a subdued inflation picture in the Euro zone and a weaker European business cycle in 2018. We also expect only a small effect on the bond markets of ECB ending the QE programme this year. Hence, we continue to see most of the expected rise in yields in 2019.
We continue to expect a steeper 2y10y German yield curve. The ECB still maintains a relatively tight grip on the short end of the curve as especially with the first ECB rate hikes expected late 2019. However, this is not the case for the 10Y segment of the curve, which is still expected to be pushed by higher US yields in 2019. We have a 1.1% (1.2%) and a 3.3% (unchanged) 12M forecast for 10Y German Bund yields and 10Y US Treasury yield.
The boost to fiscal policy in the US and the possible pricing of more rate hikes in the US, is the main reason why we still see upside for US 10Y yields. The latter will have tendency to also push long yields in the Euro zone higher.
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