The ECB disappointed the market last week. Many market participants had expected further policy easing in the form of new interest rate cuts or an extension/expansion of QE.
The ECB's wait-and-see stance, combined with Fed members' rather hawkish rhetoric and a Bank of Japan apparently also hesitant to ease policy further, prompted a rise in global yields and a steepening of the 2-10Y and 10-30Y curves, thus hitting mainly the long end.
However, our overall expectation is that global central banks will continue their expansionary monetary policies. We do not expect the Fed to raise interest rates this year - especially in light of recent weak numbers for the US economy. Given the still very low level of inflation, we also expect the ECB to extend its comprehensive QE programme to run throughout 2017 and not just until March. Furthermore, we believe global bond investors will take advantage of even minor yield rises to increase their positions and duration. While it may sound odd to many investors, a German 10Y yield in positive territory is a 'good deal'.
We generally maintain our forecast of long DKK and EUR yields being range-bound over the coming three-six months with a slight downside risk on a 3M horizon. However, we still see yields rising slightly on a 12M horizon as the Fed, despite everything, begins to raise rates and the market can begin to price in the ECB ending its asset purchases by the end of 2017.
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