NatWest Markets Strategy & Sales

US Rates Forecast: Stick with the cycle
NWM Desk StrategyJohn BriggsJan NevruziTheo Chapsalis, CFA
22 July 2021 13:51

John Briggs
Global Head of Desk Strategy
+1 203 897 4689
Jan Nevruzi
US Rates Strategist
+1 203 897 2884
Theo Chapsalis, CFA
Head of UK Rates Strategy
+44 20 7085 9884


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The narrative has shifted from reflation to caution, but in a world of growing concerns, the US remains exceptional  

Entering 2021, the reflation theme dominated markets, reinforced by faster than expected vaccinations and growing optimism on re-openings, growth and inflation. We ourselves were espousing this theme, with bear steepening views on US rates and longs in US inflation, as well as a generally positive outlook on risk.

As we look forward to the second half and beyond, despite a series of stronger than expected US inflation reports, reflation has been replaced with trepidation.  Long yields have turned lower, on back of a Fed rhetoric shift towards a more balanced risk outlook, reassuring investors the monetary authority will not let inflation get out of control, as well as more recent concerns about peak growth (especially in Asia and specifically China) and worries that the Delta variant will force new restrictions. Thus the idea of a synchronized global recovery is on the retreat, replaced by a much more segmented outlook even if/once we move past recent worries surrounding the Delta variant.

Looking forward, within that more segmented outlook, we remain very optimistic on the US growth outlook, and this and our higher than consensus inflation forecasts will be a challenge for both the markets and the Fed in the second half.  Thus we see higher yields, but as we initially laid out in For Treasuries and the Dollar, History Rhymes back on May 5th, we continue to see the bulk of the pressure for yields focused on the belly, with a continuing flattening on 5s10s and 5s30s, as is natural for this point in the cycle. While the rise of the Delta variant is a near term and significant risk, unless rising cases lead to significant growth in hospitalizations and thus wider restrictions, we think the current scare will be “transitory”.

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Version 10.12.2020