US: Higher long-term rates and a relatively flatter yield curve - BBVA

Analysts from BBVA Research, expect US interest rates to mover higher during 2017, particularly long-term yields, supported by sentiment, expectations for growth and inflation. 

Key Quotes: 

“The FOMC December statement has revealed a unanimous vote for a 2nd Fed funds rate increase, while economic projections reinforced the Fed’s stance to stay true to its data-dependent course and to adjust the Fed funds rate trajectory accordingly if inflation expectations rise faster than anticipated.”

“The median expectation of the FOMC policy firming path has shifted from two to three rate increases in 2017. Fed funds futures are pricing in two rate hikes in 2017. However, the implied probability for another rate increase at the January/February meeting is low at 12%.”

“Year-end long-term yields have normalized at rates that have not been this high since September-October 2014. The current uptick in rates has been contained by subdued volatility, a correction in inflation expectations to 2%, and a return to positive territory for long-term and mid-term duration-risk compression.”

“We continue to expect a moderate increase in long-term yields, supported by soft risk-on sentiment and higher expectations for growth and inflation. The baseline is for higher long-term rates and for a relatively flatter yield curve, while overall long-term yields risks to the baseline projections are biased towards the upside.”