Yield Forecast: Back From The Lows‏

In early May the ECB cut the refi rate by 25bp to 0.50% and opened the door for negative deposit rates. The central bank is still mulling over an SME lending program but failed to deliver any specifics. EUR rates tested the lows following the ECB meeting.

The macro picture remains uncertain but the US economy has delivered relatively healthy data over the past month and the fear of a deeper slowdown has diminished. In Europe the macro data are moving sideways but are still at recessionary levels.

Following an initial decline, core rates have moved higher after the ECB meeting. Better US data and unwinding of excessive longs have driven the correction. For shorter maturities rates have been broadly unchanged over the past month, whereas long-end rates are a tad higher and curves a bit steeper.

The risk sentiment has overall been supported by the accommodative monetary stance of the major central banks. Peripheral bond markets have continued to perform.

International Rates
The forecasts are largely unchanged. We continue to expect higher rates and steeper curves down the road. Following the recent correction the 3M forecasts are now on par with forward markets, while our 6M and 12M forecasts remain above.

EUR rates are still expected to move gradually higher as the global growth recovery will eventually gain traction in the eurozone. However, as long as the ECB keeps a strong easing bias, the rise in rates is expected to be fairly moderate.

We continue to believe in a strengthening recovery in the US and an intensifying FOMC discussion about tapering off the QE purchases over the course of the summer will be able to sustain the moderate upward trend in US rates.

In the UK, we will most likely need to wait for the arrival of Mark Carney in July for any changes in communication and policy to take place and the publication of the August Inflation Report seems to be the obvious occasion for signalling changes.

Scandi Rates
In Denmark the bias is for a 10bp independent hike from Nationalbanken over the coming 12 months. The yield spread to Germany is expected to remain stable.

In Sweden we expect the repo rate to be kept unchanged at least the coming year. The market is pricing in a 50% probability of a rate cut in July. We see a risk of medium- and longer-term yields coming down slightly over the coming one to three months. However, unless the Riksbank cuts rates, the downside is probably rather limited.

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