Long-End EUR Rates To Move Higher

Review

The Federal Reserve surprised the markets by deciding not to start scaling down its asset purchases at the September meeting. The decision reflects more mixed data, tighter conditions for house owners and the risk of political gridlock.

Especially the latter factor has proven relevant since the US government shutdown has materialised and the debt ceiling has still not been lifted.

The Fed's decision to postpone normalisation brought relief in global bond markets, and core rates have in general declined over the past month in response to this.

In Europe, news flow has been more positive and data continues to improve gradually. For Italy, it is in particular positive that it now appears to be 'game over' for Silvio Berlusconi. This should reduce political uncertainty and add to growth prospects.

International rates

Given our positive outlook for the global economy going in to 2014, we continue to believe that long-end rates will move higher over the next year. The potential is biggest in Europe, where the very long end is still at low levels in an historical context. In the US, the long end is closer to fair levels and the near-term outlook is more uncertain.

We have kept forecasts broadly unchanged since the previous update, which implies that they are above forward markets for tenors of 5Y and above on all forecasting horizons.

We continue to expect the short end of the curve to remain more anchored, as we expect the central banks to keep policy rates low for a prolonged period. In particular, the ECB has enforced its communication on keeping money markets stable as the recovery gradually strengthens. Hence, the forecasts for 2Y segment is broadly in line with the forward markets.

Scandi rates

We are likely to have to see a further increase in EONIA rates before Danmarks Nationalbank will have to raise interest rates unilaterally, and we do not expect that to happen before next spring. Hence, we maintain our current forecast and expect DN to increase interest rates by 10bp once on a 6M horizon and once more on a 12M horizon, which is less than discounted by the markets.

For Sweden, we stick to our view that the Riksbank is likely to start hiking in September or October 2014, well ahead of both the Fed and the ECB.

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