The prospects of vaccines becoming available earlier has boosted the underlying outlook for risk assets while reducing demand for safe havens.
Source: Bank of Singapore, Bloomberg
Treasury yields have increased and hit our one-year forecasts of 0.90% and 1.75% for 10Y and 30Y bonds, respectively. With US election risks also waning now, we raise our forecasts to 1.20% for 10Y and 2.15% for 30Y yields while keeping our 2Y and 5Y forecasts largely unchanged.
Our new steeper interest rate curve forecasts, however, still project long term Treasury yields remaining at very low levels to the benefit of risk assets and the detriment of the USD.
First, the resurgence of the virus in the US and Europe is set to keep near term economic activity constrained into the end of the year.
Source: Bank of Singapore, Bloomberg
Second, over the next year, US inflation is likely to remain largely below the Federal Reserve’s 2% target. October’s consumer price data showed core inflation dipping to 1.6%YoY. In particular, sheltering costs are still running well below pre-pandemic levels as high unemployment curbs rents and subdues overall consumer price rises.
Third, further fiscal stimulus is set to be limited now to around USD0.5-1.0 trillion with the incoming Democrat Biden Administration likely to be opposed by a conservative Republican Senate.
Last, the Fed’s recent shift to average inflation targeting is set to keep its fed funds interest rate at 0.00-0.25% until as late as 2024 or 2025. This will keep short term 2Y Treasury yields anchored close to current levels as our forecasts project.Disclaimer applicable to recommendation
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Version: July 2020