Westpac Expect Nominal Yields Will Continue To Rise Throughout '22

Westpac note that "the recent range for U.S. 10-Year bond yields may be difficult to break-out of near term, as inflation expectations have been significantly recalibrated and it will take some time before it is clear what might be "transitory" inflation impulses and what might be the foundations for a potential untethering of medium term inflation expectations. Indeed, it is Westpac's long-held view that the next shift higher in nominal 10-Year bond yields (to 2% in the U.S. and 2.1% in Australia, moves of around 50bp from current levels), will need to be driven by real yields, which would reflect a stronger growth outlook, rather than by rising average inflation expectations. We think that is unlikely before central banks significantly shift their policy approaches. Indeed, we are drawn toward the Fed's 2013 taper, and its associated "tantrum". In both Australia and the U.S., nominal yields rose by more than 100bp over a relatively short period of time. However, the expected tighter policy settings were seen to lower 10-Year BEIs, with real yields rising as a result of the policy shift. We expect that will be the case again this time around, but with the Fed rhetoric unlikely to change, and the RBA set to announce a more flexible QE profile in July, it will still be some weeks/months before this signal is available as a catalyst to higher yields. Of course, to the extent that central bankers learn the lessons of the past, we would not expect the path to higher yields to be a sharp or as short, hence our view that nominal yields continue to rise throughout 2022."