Risk appetite has declined over the past month. Markets are concerned about the slow progress made in Europe and the continued weakness in European data. In the U.S., prospects of tough negotiations related to the fiscal cliff are weighing on sentiment.
Global yield curves have flattened on the back of bullish sentiment in the fixed income markets. Consequently, longer-dated yields are at the low end of ranges that have prevailed over the past six months.
The rally in core markets has caused wider ASW spreads and periphery-to-core spreads have widened again, although not dramatically. Global equity markets have softened and positioning data confirms the negative bias.
We do not expect further easing in the near term from the Fed or the ECB apart from what has already been announced. Further, we now expect the BoE to be on hold for the near future, as data indicates some economic stabilisation.Short-end rates have very limited further room to decline. We expect fixings and two-year swap rates 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 six to 12 months.
We continue to look for some curve steepening in six to 12 months driven by moderate increases in long-end rates. Curve steepening will be most pronounced in USD and driven mostly by tenors beyond 10 years. Our 10-year forecasts are above the forward market.
Given the recent deterioration in market sentiment and the renewed strengthening of the DKK, we postpone our expectations for independent Danish interest rate hikes until spring 2013. Next year, as event risk eventually recedes and global growth picks up, the appetite for DKK assets should subside again and EUR/DKK move back towards central parity. We believe this will reignite expectations of independent Danish central bank hikes.
As pricing on the Riksbank is already aggressive given its unwillingness to cut rates further, the curve is unlikely to steepen in the short run unless we see a global sell-off at the long end. In the longer term, the Swedish yield curve remains flat on a relative basis and we expect Swedish short rates to converge towards European short rates.
Norges Bank now expects to hike rates to 1.75%, from 1.50% currently, sometime between March and August 2013. Norwegian swap rates are high relative to swap rates in the eurozone. Relative to domestic government bond yields, however, they are relatively low. We expect the general economic development in Norway to put upward pressure on domestic swap rates.
Next Yield Forecast update is due on December 14.
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