ECB Removes Its Easing Bias‏

The appetite for risky assets has increased further going into 2013, underpinned by the ongoing improvement in macro data and major central banks maintaining their commitment to support the markets. This has caused further spread compression in the peripheral government bond markets and pushed up yields in the core bond markets towards the higher end of the ranges that prevailed since last summer.

In EUR swap markets, the curve has steepened in the 0-5Y segments since the ECB removed its easing bias, as this has removed most of the tail risk of negative deposit rates being introduced. In the 5Y-30Y segments, the EUR swap curve moved higher in a parallel way. Meanwhile, in the US, the curve steepened across the entire curve after the fiscal cliff was partially solved.

International rates
The ECB's decision to signal no further rate cuts removed some downside risks for EUR rates. We have therefore lifted our short-end forecasts to account for this. The repayment of LTRO money could add some upward pressure on the short end of the curve but the magnitude of the impact is very uncertain. Our forecasts for short-end EUR rates are broadly in line with the forward markets.

Near-term, we believe that uncertainty related to the upcoming debt-ceiling debate in the US and a temporary weakening in consumer data will keep USD and EUR swap rates in their ranges. Hence, the move higher in the longer end of the curve might pause in the near-term and we expect the ranges to prevail in the near-term. However, as we get beyond the debt-ceiling debacle and economic data continues to improve, we expect the upward trend in long-dated rates to resume in Q2 this year. In general, we see more potential upside risk for US rates relative to EUR rates.

In the UK, we think more QE is unlikely. Undoubtedly, the MPC stands ready with additional easing if the outlook for the UK economy deteriorates further.

Scandi rates
EUR/DKK continues to hover around and above central parity. However, there is still very little currency outflow according to data from Nationalbanken and we judge that this picture has not changed much recently. We expect risk sentiment to continue to improve into 2013 but we do not expect any independent Danish interest rate hikes until late spring. Our 3M forecast remains for unchanged policy rates, while our 6M forecast includes a 20bp rise in the lending rate to 0.4% and the certificate of deposit rate to 0.0%.

In Sweden, a February cut is unlikely, in our view. Rather we expect Riksbanken to lower its repo rate by 25bp in April. Our expectations are roughly in line with the forward markets.

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