US: How much further US 10yr yields could rise? - Westpac

Research Team at Westpac, suggests that the Fed Vice-Chairman Fischer’s suggestion that two hikes are possible this year has produced a bearish impulse to start the week, sparking the question as to how much further US 10yr yields could rise?

Key Quotes

“Despite reacting to Fischer’s words, market pricing clearly reflects a strong scepticism over whether even one hike will be delivered this year. With that in mind, data outcomes as we head into the September FOMC will be of considerable importance to the Fed’s decision-making process, starting with the all-important Payrolls on Friday.

In our view, on strong data outcomes, US 10yr bond yields can probably push toward the 1.70-75% level, which would be a full reversal of the post-brexit rally, but a strong impulse higher would eventually see support re-emerge as the Fed will maintain a gradual pace and global growth and inflation outcomes will not be sufficiently strong to outweigh QE-related and global RV-encouraged yield seeking behaviour by investors. So we think that the market may explore higher yields over coming days, but on a medium term basis we are not particularly bearish.

Given that the RBA has a the opposite policy stance to the Fed, how far could domestic yields rise? Would we not expect 3yr bond yields to trade sustainably above the current cash rate (5bps away) as it will encourage good “carry”-style demand, while 10yr bond yields are unlikely to push materially above 2% (10bps away) before support returns.

We continue to see the 3yr futures ranges over the next month as 98.52– 98.62, with 10yr futures trading a 97.90 – 98.20x range. The latter is more vulnerable to global sell-offs, while the former remains well-anchored versus RBA pricing.”