US Treasury Bond yields set to keep rising throughout 2021 – Danske Bank

The risk rally triggered after the announcement of a potential COVID-19 cure prompted investor to get rid of safe US Government bonds and jump into risky assets, a trend that, according to the Danske Bank’s Research Team is set to continue into next year, pushing the yield of the US 10-year Treasury note to 1.10%.

Key quotes

“Global financial markets have had no lack of drama in the past couple of weeks, with three landmark moments: the US presidential election, a coronavirus vaccine from Pfizer and new announcements from the ECB - all news that will have great significance for the international fixed income markets, not just in coming weeks but throughout 2021.”

“Getting a major COVID-19 package through Congress as soon as he steps into the White House, which is what he wants, could well prove difficult for Biden. However, we estimate that he will successfully get a sizeable package passed early in the new year – either by getting a majority vote or by working alongside a number of Republicans in Congress. Hence, as well as the already expected major budget deficit and refinancing requirement, there is likely to be a large, extraordinary funding requirement in 2021, so US Treasury issuance is set to surge. “

“Next, positive news from Pfizer has brought forward the timing of when we might expect a viable vaccine. This could have decisive significance for how the global economy develops in 2021. If the vaccination of vulnerable groups can start as early as the opening months of 2021, then the market and companies may begin to see an end to lockdown, which could mean a faster and stronger recovery in 2021.”

“We have also seen US yields, in particular, increase, with 10Y US yields rising by close to 15bp to 0.93% since the vaccine news came out. German yields have risen by a little less. In our view, the sector rotation could continue in coming months, not only in the equity market but also in terms of investors selling bonds, both to reduce their duration risk and because some investors have bought safe-haven bonds, which are less needed now.”