US government bond yields to rise in coming quarters - Wells Fargo

Analysts at Wells Fargo, forecast that yields on US government bonds will rise in coming quarters as the Federal Reserve hikes the fed funds rate further and as Treasury issuance continues to increase. But they warn that the sizable holdings of Treasury securities on the Fed's balance sheet means that the level of the yield curve likely will be lower than it would be otherwise. 

Key Quotes: 

“We estimated that the size of the Fed’s balance sheet will shrink from roughly $4.2 trillion at present to only $3.7 trillion or so by late 2019/early 2020 before it starts to grow organically again. As noted above, Fed policymakers have indicated their desire to eventually wind down their holdings of MBS completely. Consequently, the Fed will end up holding trillions of dollars of Treasury securities on its balance sheet.”

“We forecast that yields on U.S. government bonds will rise in coming quarters as the Fed hikes the fed funds rate further and as Treasury issuance continues to increase. However, sizable holdings of Treasury securities on the Fed’s balance sheet means that the level of the yield curve likely will be lower than it would be otherwise.”

“The implications of the Fed’s portfolio management strategy for yield curve shape are more uncertain. We have outlined a few reasons why we think that the Fed may want to shorten its maturity profile, which would induce some steepening pressure. However, the Fed may determine that there are more compelling reasons to maintain a relatively long-dated portfolio. To the best of our knowledge, Fed officials have not yet determined their portfolio strategy once the balance sheet shrinkage comes to an end, and discussions within the Federal Reserve System undoubtedly are ongoing.”