Review
The trend for lower long bond yields has continued among rising geopolitical tensions and the view of lower terminal rates from central banks.
In the meantime, short-end rates in the US and the UK remain close to recent highs, which reflect that policy normalisation is drawing closer.
In Europe, a temporary growth pause has reinforced downward pressure on rates and so far the ECB's measures have been unable to lift growth and inflation expectations.
Also, in Norway and Sweden, the yield curve flattening has continued throughout the summer, reflecting the impact from lower long bond yields in bigger markets.
International rates
The Fed is now expected to hike in April 2015. With growth and inflation firming and markets expecting a relatively shallow hiking cycle, there is room for higher US rates.
The UK will be the first big central bank to tighten monetary policy. A first hike is forecast in early 2015. Rates will move higher in the coming months.
In Europe, a slow recovery and ongoing deflation risks will keep the ECB on hold for a long period. Rates up to five years will remain fairly anchored.
The EUR swap curve is expected to steepen as policy tightening in the US and the UK and an improving European economy will push long-tenor rates higher again.
Scandi rates
We expect the Danish central bank to stay on hold but if the ECB's TLTROs boost euro-liquidity sufficiently, it could put pressure on EUR/DDK and lead to a rate cut.
Following the 50bp rate cut in June, the Riksbank is expected to stay on hold for a long time. A subdued growth outlook will limit room for higher longer-term rates.
The room for a rate cut in Norway is now relatively limited as inflation has picked up again. We look for higher Norwegian rates in the coming months.
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