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NEW YORK, Jan 5 (Reuters) - Benchmark U.S. 10-year Treasury yields will climb to 3 percent at the end of 2017 as investors demand higher compensation in anticipation of a pick up in business activity from possible fiscal programs under a Trump administration, Credit Suisse analysts said on Thursday.
The possibility that the Federal Reserve would raise interest rates up to three times in 2017 would propel bond yields higher from current levels, they said.
"It will therefore take some combination of an increase in real and inflation risk premia, and a rise in inflation expectations to push nominal yields higher. Expectations for the terminal rate may also increase as markets price a Fed response to rising inflation," Credit Suisse analysts Praveen Korapaty, William Marshall and Jonathan Cohn wrote in a research report.
Bond yields around the world rose sharply following Donald Trump's surprise U.S. presidential win on Nov. 8. Investors dumped bond holdings on the notion that Trump's proposed economic policies, including tax cuts, infrastructure spending and looser regulations, would result in higher inflation and federal borrowing.
A vicious five-week selloff slashed about $2 trillion in value from bond markets around the world, as investors reallocated from fixed income to stocks and other assets. During that time, the U.S. 10-year yield reached 2.64 percent, its highest since September 2014.
Perception that the Fed might raise interest rates at a more aggressive pace than previously thought due to faster growth and inflation from possible fiscal stimuli further reduced bonds' appeal.
Since mid-December, bond yields have retreated on bargain-hunting and as traders await details on Trump's fiscal programs. The U.S. 10-year yield on Thursday eased to a one-month low of 2.37 percent.
"We expect a brief respite, followed by a resumption in the selloff in fixed income as the details of the Trump economic agenda become clearer," the Credit Suisse analysts said.
They expected the 10-year yield would advance to 2.8 percent in the end of the first half and reach 3.0 percent by year end.
They projected the two-year Treasury yield would rise to 1.45 percent in the first half and 1.80 percent at the end of 2017. (Reporting by Richard Leong; Editing by Meredith Mazzilli)