Review
Core bonds yields have continued to slide in the long end of the curve and German Bond yields have again hit new record lows amid a steep decline in oil prices.
European rates markets are now pricing in a scenario of secular stagnation, i.e. a scenario where neither growth nor inflation will return in the next decade. In the US, market expectations have moved towards the Fed postponing its hiking cycle, as inflationary pressures are low and oil prices keep dropping.
International rates
Looking forward, we expect the ECB to expand its balance sheet significantly and, next week, we expect it to announce purchases of government bonds. If QE finally approaches a credible pace, then we should expect some gradual steepening of the curve from the very long end. We do not expect 10Y EUR rates to move lower on more QE, but the upside is also fairly limited in the coming quarters.
EUR rates sub 5Y still have downside potential and Euribor fixings should move even closer towards zero as the ECB eventually boosts liquidity in the euro system.
In the US, our forecasts are above the forward markets across the curve, as we expect the Fed to start hiking in June this year. Due to significant curve flattening, we would expect any upward moves in rates to lead to a parallel shift in the curve.
Scandi rates
Given the current level of EUR/DKK significantly below the central rate following the move from the SNB and with the ECB expected to boost EUR liquidity, we still see a case for further monetary easing in Denmark. We expect two Danish rate cuts on a 12-month horizon.
In Sweden, our baseline scenario is that the Riksbank will keep the repo rate on hold at zero throughout 2016, but more easing cannot fully be ruled out. In Norway, the market is now pricing in more than two more rate cuts in 2015. We believe this aggressive pricing will continue for the next six months, but eventually a correction should be expected if rates are cut only once in 2015.
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