US Reflation: A possible road-map for Treasuries - ING

According to the analysts at ING, since Trump’s election it has been the reaction in the US bond market which has dominated global financial assets.

Key Quotes

“Making a call on the 2017 path for US 10-year yields will be crucial in determining whether US bond yields continue to diverge from peers in lockdown (Eurozone and Japan). Higher US Treasury yields would drive the dollar stronger and typically spell trouble for investors in the EM bond world.” 

“We think Treasury yields could make another run to the upside in 1Q17, briefly pushing through 2.50% as Trump presents his wish-list (the President’s budget). Some retracement may be evident in the following two quarters as Congress curtails some of his plans. 4Q17 could see yields moving higher again as speculation builds over the Fed shrinking its balance sheet and US growth expectations increase for 2018, once tax cuts kick in.”

“Importantly we err on the side of a benign Treasury market sell-off – in other words one that does not send equities sharply lower. The growth impulse from fiscal stimulus, including a tax holiday on up to US$2 trillion of US overseas retained earnings, should be enough to see US corporates ‘out-earn’ the rise in bond yields and allow equity markets to remain constructive. Protectionism and/or a repeat of the 10%+ 2015 dollar rally would be the main risks to this view.”