Global Recovery To Push Long-End Rates Higher

The global economic expansion is gaining strength. Major central banks are backing up the recovery by maintaining their dovish stances.

Risk asset markets have performed strongly despite a correction in early February. The spread compression between peripheral and core bond markets continues.

The ECB struck a fairly dovish tone at its January meeting and it appeared that Draghi tried to tame worries about too rapid increases in EUR swap rates and EUR/USD.

Since the ECB meeting, money market fixings have stabilised and the EUR swap curve has re-steepened with the markets being less worried about premature ECB exit.

International rates

Our macro view remains consistent with an ongoing global recovery, and our confidence for a sustainable recovery is intact.

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

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

The case for further curve steepening thus 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 expect Nationalbanken to deliver another 10bp rate hike in the coming months. This will mark the end of the period of negative rates in Denmark. Following this we expect unchanged policy rates towards the end of the year. The timing of the subsequent rate hikes will then depend on the speed of normalisation of liquidity in the euro system.

We factor in another two symmetrical Danish rate hikes on a 12M time horizon. This will bring the repo rate to 0.6% from the current level of 0.3%. We expect spreads between DKK and EUR swaps to remain broadly stable. The risk is however that the spreads will widen if the risk appetite broadens further.

In Sweden, we no longer expect Riksbanken to cut the repo rate below the 1.00% level. In our view, recent Swedish data suggests that the economic cycle has turned for the better and this - together with the household debt restriction - is the main reason why we have done away with our April rate cut call.

We still believe that Norges Bank will hike rates in 2013 but we have pushed the timing for this hike back to December 2013.

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