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(Bloomberg) -- The Fed’s gradual wind down of its balance sheet will push 10y UST yields higher as term premium rebounds in a move that will have knock-on effects abroad, Goldman Sachs strategist Francesco Garzarelli wrote in a note Thursday.

• The Fed’s $2.5t in Treasury holdings currently has a ”stock effect” on 10y UST yields of about 50bp - roughly equal to how much the yields diverge from what macro variables dictate they should be
• Increases in 10y yields as the balance sheet contracts will be moderate to start and “ultimately add up to around 50bp when the balance sheet has returned to around pre-QE levels”
  • Analysis shows 10y yield to rise by 2bp-3bp for every $100b of intermediate-maturity debt the Fed lets roll off and causes Treasury to sell to private investors
  • Baseline yield forecasts include 20-25bp increase in yields due to Fed’s balance sheet reduction by the end of 2018, mostly in second half
• Treasury yields’ expected climb as Fed debt stock declines relates to rise in term premium, or extra compensation demanded to hold long-term debt
  • This term premium increase will also be catalyst for higher U.K., German and Japanese long-term debt yields
  • Each 10bp increase in 10y UST term premium will cause a rise in term premium of 6bp in similar-maturity gilts, 5bp in German bunds and 2bp in JGBs
  • Garzarelli stresses there are “large uncertainties” around analysis, given no historical precedent for Fed balance-sheet unwind

To contact the reporter on this story: Liz Capo McCormick in New York at emccormick7@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Greg Chang

--Washington Newsroom (202) 624-1820

(Bloomberg) -- Following are forecasts for today’s economic releases as compiled by Bloomberg News.

• LEI 0.3% m/m; range 0.1% to 0.6% (35 estimates)
• “The closely- watched coincident-to-lagging ratio has trended lower in recent years, bouncing around multi-decade lows and implying modest growth in aggregate demand”: Bloomberg Intelligence

To contact the reporters on this story: Alex Tanzi in Washington at atanzi@bloomberg.net; Vincent Del Giudice in Denver at vdelgiudice@bloomberg.net To contact the editors responsible for this story: Alex Tanzi at atanzi@bloomberg.net Kristy Scheuble

--DEREK WALLBANK