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US 2-year yield and volatility to march higher – Wells Fargo

FXStreet (Córdoba) - According to analysts from Wells Fargo volatility and the US 2-year yield is likely to increase in the coming weeks as the Federal Reserve gets ready for a rate hike.

Key Quotes:

“The term premium component of the two-year Treasury continues to reflect a softening outlook for inflation but greater volatility and some upside risk is likely in the coming weeks as a December rate hike approaches.”

“Once the inflation environment begins to stabilize, there could be some further upside risk to the two-year Treasury yield but the potential upside of the yield is likely to be constrained by further downward revisions to the FOMC’s long-run fed funds rate projections.”

“We would point out to our readers, however, that the year-over-year comparables become a little more difficult for November’s inflation readings given that the slide in gasoline prices accelerated in November of last year.”

“We continue to expect that inflation measures will have stabilized to a point that the FOMC will be comfortable with a December lift off. As such, we expect greater volatility in the two-year Treasury yield over the coming weeks as markets weigh carefully every economic data point.

“Furthermore, we expect the two-year yield to gradually march higher on average as we approach the December 16 FOMC meeting announcement and press conference.”

“We expect further downward revisions to the dot plot and long run potential fed funds rate, which should keep a lid on the two-year yield from climbing significantly higher. We maintain the view of an ongoing flattening of the yield curve as the tightening cycle progresses.”

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