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The United States Treasury yields are expected to increase further up on rising Federal Reserve’s interest rate risks and President Donald Trump’s polices within first 100 days in office. We at FxWirepro foresee that the 10-year yields will break 3 percent mark by end-2017, the highest level in three years.
In it worth noting that the Federal Open Market Committee increased the fed funds rate to a 0.50-0.75 percent range for the first time in 12 months, as widely expected. The statement noted that information received since the November meeting indicates that the labour market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year.
Also, the new projections showed that the central bankers expect three quarter-point rate increases in 2017, up from the two seen in the previous forecasts in September, based on median estimates. Also, the ongoing sell-off in U.S. Government bonds is mainly because of Donald Trump’s fiscal spending appeal, which is expected to be financed from government borrowing and not because of growth in U.S. economy.
We see risks skewed towards higher US Treasury yields as positioning is probably cleaner now than a couple of weeks back and we will get more details on US fiscal stimulus plans during Trump’s first 100 days in office, reported Danske Bank in its report.
If Trump successfully implements his fiscal plan in its budget proposal, which is scheduled to take place on February 6, consumer inflation will surely rise, giving the Federal Reserve wider space for an interest rate hike. Thereby, rising Fed fund rate will increase the cost of borrowing. Also, increase in government debt will raise the risk of potential default. After the Presidential election result, Treasuries witnessed a massive sell-off, sending the 10-year yields higher by 80 basis points in just a month’s time.
Moreover, due to the strong US economic data recently, we will look for signs in next week’s FOMC statement on whether the next Fed rate hike could come as soon as March or May.
The markets also remain keen to focus on the upcoming FOMC first monetary policy meeting of 2017, which is scheduled for February 1. We foresee the U.S. Federal Reserve will keep the fed funds target range at 0.50 percent to 0.75 percent unchanged. Also, the upcoming meeting will not have an updated projection and thus the statement would be read carefully for any hints of when the Fed might hike next.
Lastly, the Danske Bank in its report mentioned that the USD to strengthen in line with the receipt of more detail on the new US government’s fiscal stimulus plans and probably other tariff and tax measures during Trump’s first 100 days in office.
