This year's sell-off in risky assets and in particular oil is overall a supportive factor for global fixed income markets. However, in general, the impact on global government bond markets has been smaller than one would expect given the significant sell-off in risky assets. One reason might be that the crisis has its origin in China and that the Chinese currency reserves together with sovereign wealth funds from oil countries are at the moment being run down, which results in selling of bonds, 'destroying' the otherwise very bond-friendly environment.
We stick to our view that the Fed will hike three times in 2016, not least as the labour market continues to tighten, and we expect US yields to start trending higher again, most significantly at the shorter end of the curve. We continue to expect a certain flattening of the curve 2Y10Y and 5Y10Y. The higher US yields are also the reason we see marginally higher 10Y European yields on a 6M and 12M horizon.
However, the outlook has certainly become more blurred over the past two weeks and especially for the US we acknowledge that the risk is on the downside for our yield forecasts.
We have changed our call on the Riksbank and now expect a rate cut of 10bp next month.
The Brent oil price declined in the first part of January to slightly below USD30/bl. An oil price at the current level may trigger a cut in Norges Bank's target rate at the upcoming board meeting on 17 March by 25bp to 0.50%.
In Denmark, the currency outflow accelerated after the ECB meeting and at the beginning of this year, the central bank raised the deposit rate by 10bp to -0.65%. Given that the market is pricing a new rate cut from the ECB and that the negative carry on long DKK positions in the FX market is now relatively small. we expect the Danish deposit rate to stay at the current level for the rest of 2016.
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