Citi: How Much Higher (For Yields)?

Citi write “the rates sell-off continues as the market reconsiders early rate cut prospects across Fed/ECB/BoE, in line with our bearish tactical view”

• “Yesterday was UK-led thanks to the CPI surprise, taking 10yr gilts very close to 4.00% which we had said could be surpassed relatively quickly, and is also our latest 1Q24 average yield forecast.”
• “For Bunds, our new 1Q24 average yield forecast is 2.25%.”
• “Both express a view that the sell-off may have further to run near-term, but ultimately average around current levels to end-March.”
• “Taking Bunds as an example, if ECB cut pricing to June converges further towards the house view of 25bp, recent price action suggests 10yr Bunds may be dragged to 2.60-2.70% in yield terms.”
• “However, we expect growing de-coupling re: near-term rate cut prospects given: easing is likely just pushed out; the risk that the ECB waits too long and then has to start quickly; and still stable inflation risk premium. That, we think, limits the extent of a sustainable further sell-off from here.”