Yield Forecast: Short-Term Uncertainty - Long-Term Recovery‏

Global economic expansion is gaining strength driven by a strong US, and major central banks backing up recovery by maintaining their dovish stances.

The situation with the Cypriot rescue package is the wild card and carries the risk of regenerating concerns on the eurozone's fundamental framework.

Our main view is that a resolution for Cyprus will be found in the relatively near term, while trust in the region's crisis management framework remains intact.

Elections in Italy served as a reminder that the process of politics is sometimes more uncertain than the market would prefer.

International rates
At the latest ECB meeting, Mario Draghi indirectly sent the message that today's poor data will not trigger a rate cut, as long as the ECB expects that recovery will come. He also stated that the ECB will provide liquidity for as long as required.

We expect the central banks to keep their accommodative stances, implying a strong anchoring of short-end rates. Our forecasts for short-end rates are therefore factoring in only a very moderate increase over the coming year.

Forecasts for the long end of the curve assume that rates will break up into higher ranges compared with the past year. Forecasts for tenors of 10Y or above are above forward markets on all time horizons up to one year.

The case for further curve steepening remains very strong in the coming quarters. The steepening move is expected to be led primarily by higher long-end US rates.

Scandi rates
In Denmark, we push out our forecast on rate hikes and now expect Nationalbanken to deliver another 10bp rate hike on a six-month horizon. Pressure on EUR/DKK has eased on the back of the Italian election. We do not expect the move seen in the euro money markets in January to be repeated over the next couple of months.

We factor in a total of two symmetrical Danish rate hikes on a 12M time horizon. This would bring the repo rate to 0.5% from the current level of 0.3%. We expect spreads between DKK and EUR rates to remain broadly stable. The risk is, however, that spreads will widen if risk appetite broadens further.

In Sweden, we think that that the Riksbank rate cut in December 2012 was the last in this cycle. In addition, given the recent strong data out of Sweden, we have put in a rate hike on a 12-month horizon.

We are in line with Norges Bank's projection for the next rate hike to be in the spring of 2014.

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