Yield Forecast Update: Curve Steepening To Continue‏

Risk appetite has, in general, improved over the past month as global macro data continues to advance gradually. However, in the US, the slow progress related to resolving the fiscal cliff is a cause for some nervousness.

The Fed surprised by announcing numerical threshold values for unemployment and inflation which will guide the first Fed funds rate hike. In addition, the expiring Twist programme was fully replaced by outright treasury purchases of USD 45bn per month.

The EUR rate curve has been relatively flat over the past month, whereas the US curve has steepened from the long end in response to the Fed's easing initiatives.

The core EUR government bond markets have performed over recent months, despite the improving sentiment. The periphery has performed even better and spreads-to-core have narrowed further.

International rates
The Fed's decision supports the case for further steepening of the US curve going into 2013 and we continue to see more upside risk for US rates relative to EUR rates. We do not expect the ECB to cut rates further, but it is a close call. Its decision is very data dependant. Unless a moderate recovery materialises in the coming months, the ECB is likely to cut its refi rate again.

Short-end rates in EUR have very limited further room to decline unless the ECB cuts the deposit rate. Fixings and 2Y swap rates are expected to level out close to the current levels. Our rate forecast is broadly unchanged and deploys a more or less flat path over the next 6-12 months.

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. The Bank of Canada's governor, Mark Carney, has been appointed to take over in July 2013.

We continue to look for some curve steepening in 6-12 months. The move is expected to be most pronounced in USD and mostly driven by tenors beyond 10 years. Our 10Y forecasts are above the forward market.

Scandi rates
EUR/DKK hovered close to the central parity in November. However, there was very little currency outflow during November according to data from Nationalbanken and we judge that this picture has not changed much in the first weeks of December. We expect risk sentiment to continue to improve going into 2013 but we do not expect any independent Danish interest rate hikes until spring 2013.

Given current pricing on the Riksbank, we would not expect much reaction if the Riksbank actually does ease (unless it sounds verbally dovish too), while unchanged rates would send front-end yields higher.

In Norway, a rate increase to 1.75% is now expected to occur sometime between March 2013 and August 2013.

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