This week, Jamie Dimon, CEO of JPMorgan, advised investors to prepare for 4% yield levels in the US.
At the time of writing, the 10-year US Treasury yield is hovering around 3%. Although we see room for further yield increases as well, 4% seems too far-fetched. We expect the US 10-year yield to be at 3.2% at the end of this year. The US government is stimulating growth and the Federal Reserve (Fed) is ready to hike its policy rate further. At the same time, the Fed is stopping its reinvestment of asset purchases, letting securities mature without reinvesting the proceeds (effectively pulling money out of the system). The big question remains: when will all this lead to inflationary developments?
The interest rate story in the eurozone is somewhat different. Last week’s disappointing inflation numbers actually caused the 10-year yield on German Bunds to drop. For Europe, the big question is: when and how is the ECB going to stop its asset purchase programme? As long as the ECB is buying corporate bonds, it provides support to this bond segment. However, as it is clear that the ECB will pull the plug on its asset purchases somewhere in the second half of this year, we are getting less comfortable with holding a large position in euro corporate bonds. Risk premia on corporate bonds have increased lately, with prices – moving inversely to yields – falling. Recently, it became clear that the ECB had been buying less than previously anticipated by investors.