US 10-year yield to rise to 1.7% by year-end - Lloyds Bank

Analysts from Lloyds Bank expect one rate hike during 2016 from the Federal Reserve and two hikes during 2017, leading to a rise in market interest rates. 

Key Quotes:

“The US bond market has been volatile in recent weeks. Ten-year Treasury yields at one point traded as low as 1.32%, before rebounding above 1.60%. In contrast to many other central banks, the expectation remains that the next move in US policy rates will be up.”

“We continue to expect that the Fed will raise interest rates before year end, probably at the December meeting. The July payrolls increase of 255k was the second successive monthly gain in excess of 250k, well above the average monthly increase over the last two years (224k). This suggests that the US labour market remains in good shape and that May’s anaemic employment gain of only 24k was an anomaly.”

“Even before the July data some Fed policymakers were arguing that an interest rate rise at the next September FOMC meeting was a possibility. With one more payrolls release due before then it is still possible that another strong report could induce a near-term policy move. Comments from other Fed officials, however, point to a more cautious approach. We believe it is more likely that the FOMC will wait until December. This would be after the presidential election. By that time there would also be clearer indications whether GDP growth has picked up in the second half of the year and whether inflation continues to edge up. We expect one rate rise of 0.25% this year, followed by two hikes in 2017.”

“This environment of gradual rises in policy rates is also likely to result in a further gradual increase in market interest rates. We expect yields to rise along the curve with 10-year yields rising to 1.7% by end 2016 and 1.9% by end 2017.”