yield forecast update - denmark to cut twice after snb ... · [email protected] yield forecast...

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Investment Research — General Market Conditions

Review

Core bonds yields have continued to slide in the long end of the curve and German

Bond yields have again hit new record lows amid a steep decline in oil prices.

European rates markets are now pricing in a scenario of secular stagnation, i.e. a

scenario where neither growth nor inflation will return in the next decade.

In the US, market expectations have moved towards the Fed postponing its hiking

cycle, as inflationary pressures are low and oil prices keep dropping.

International rates

Looking forward, we expect the ECB to expand its balance sheet significantly and,

next week, we expect it to announce purchases of government bonds.

If QE finally approaches a credible pace, then we should expect some gradual

steepening of the curve from the very long end. We do not expect 10Y EUR rates to

move lower on more QE, but the upside is also fairly limited in the coming quarters.

EUR rates sub 5Y still have downside potential and Euribor fixings should move even

closer towards zero as the ECB eventually boosts liquidity in the euro system.

In the US, our forecasts are above the forward markets across the curve, as we expect

the Fed to start hiking in June this year. Due to significant curve flattening, we would

expect any upward moves in rates to lead to a parallel shift in the curve.

Scandi rates

Given the current level of EUR/DKK significantly below the central rate following

the move from the SNB and with the ECB expected to boost EUR liquidity, we still

see a case for further monetary easing in Denmark. We expect two Danish rate cuts on

a 12-month horizon.

In Sweden, our baseline scenario is that the Riksbank will keep the repo rate on hold

at zero throughout 2016, but more easing cannot fully be ruled out.

In Norway, the market is now pricing in more than two more rate cuts in 2015. We

believe this aggressive pricing will continue for the next six months, but eventually a

correction should be expected if rates are cut only once in 2015.

16 January 2015

Quick links

Eurozone forecast

US forecast

UK forecast

Denmark forecast

Sweden forecast

Norway forecast

Forecast table

Policy rate outlook

Source: Danske Bank Markets

10-year bond yield outlook


Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]

Yield Forecast Update

Denmark to cut twice after SNB move and more QE from ECB

Country Spot +3m +6m +12m

USD 0.25 0.25 0.50 1.00

EUR 0.05 0.05 0.05 0.05

GBP 0.50 0.50 0.50 1.00

DKK 0.20 0.10 0.10 0.10

SEK 0.00 0.00 0.00 0.00

NOK 1.25 1.00 1.00 1.00

Country Spot +3m +6m +12m

USD 1.72 2.20 2.50 3.00

GER 0.45 0.60 0.65 0.80

GBP 1.47 1.75 1.90 2.30

DKK 0.66 0.88 0.91 1.04

SEK 0.76 0.65 0.70 0.80

NOK 1.39 1.35 1.55 1.85

mailto:[email protected]

2 | 16 January 2015 www.danskeresearch.com

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Contents and contributors

Eurozone ...................................................................................................................................................................................................................................................................... 3

Macro Analyst Pernille Bomholdt Nielsen +45 45 13 20 21 [email protected]

Interest rates Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]

US ...................................................................................................................................................................................................................................................................................... 4

Macro Senior Analyst Signe Roed-Frederiksen +45 45 12 82 29 [email protected]

Interest rates Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]

UK ...................................................................................................................................................................................................................................................................................... 5

Macro & Interest rates Senior Analyst Morten Helt +45 45 12 85 18 [email protected]

Denmark ....................................................................................................................................................................................................................................................................... 6

Macro Senior Economist Las Olsen +45 45 12 85 46 [email protected]

Interest rates Senior Analyst Jens Nærvig Pedersen +45 45 12 80 61 [email protected]

Senior Analyst Lars Tranberg Rasmussen +45 45 12 85 34 [email protected]

Sweden .......................................................................................................................................................................................................................................................................... 7

Macro & Interest rates Chief Analyst Michael Boström +46 (0)8-568 805 87 [email protected]

Senior Analyst Michael Grahn +46 (0)8-568 807 00 [email protected]

Senior Analyst Marcus Söderberg +46 (0)8-568 805 64 [email protected]

Senior Analyst Carl Milton +46 (0)8-568 805 98 [email protected]

Norway .......................................................................................................................................................................................................................................................................... 8

Macro & Interest rates Chief Analyst Arne Lohmann Rasmussen +45 45 12 85 32 [email protected]

Forecast table .......................................................................................................................................................................................................................................................... 9


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Eurozone forecast

Growth and inflation

We expect the euro recovery to gain strength in 2015, as a number of headwinds are fading.

First of all, the drop in the oil price will boost private consumption through higher real wage

growth and exports are supported by the currency depreciation. Business surveys improved

at the end of 2014, suggesting investments should bottom as geopolitical uncertainty has

faded. However, there is a risk that the Greek election fuels renewed uncertainty and results

in postponed business investments. The euro area was in deflation in December for the first

time since the financial crisis in 2009. We expect negative inflation during most of 2015, as

the sharp decline in the oil price will have a large negative impact. Core inflation is also low

and close to its historical low of 0.7%.

Monetary policy and money markets

The ECB is under pressure to ease again, as the euro area is in deflation and as the current

easing measures are insufficient to expand the balance sheet sufficiently. Based on this we

expect the ECB to announce government bond purchases at the upcoming meeting on 22

January. This should follow as there is a risk of de-anchored inflation expectations, even

though the oil price decline supports the recovery. There is still downside for money market

fixings, as excess liquidity gets a boost. We expect 3M Euribor to decline to around zero and

6M Euribor to around 10bp and stay there for at least three years. Hence EUR rates sub 5Y

should inch lower.

Yield curve

The flattening of the EUR swap curve has continued and even intensified in recent months,

as the market is pricing in secular stagnation in Europe. We believe the move lower in the

long-end rates is a bit overdone by now and we do not forecast 10Y rates going lower from

here. However, they are probably not going to increase much either, as the ECB will embark

on QE and inflation is likely to remain negative for most of 2015.

3M Euribor 10Y EUR swap rates

Source: Macrobond, Danske Bank Markets Source: Macrobond, Danske Bank Markets

Forecast summary


EUR swap curve


EUR Spot +3m +6m +12m

ECB 0.05 0.05 0.05 0.05

3M 0.06 -0.02 -0.02 -0.02

2-year -0.16 -0.10 -0.10 -0.10

5-year -0.05 -0.05 0.00 0.15

10-year 0.45 0.60 0.65 0.80

2-year 0.13 0.15 0.15 0.15

5-year 0.29 0.25 0.25 0.40

10-year 0.71 0.80 0.85 1.00

Money market

German government bonds

Swaprates

-30

-25

-20

-15

-10

-5

0

0.0

0.5

1.0

1.5

2.0

0 3 6 9 12 15 18 21 24 27

Change,bp (rhs) 15-Dec-14 15-Jan-15

% bp


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US forecast


US GDP grew a whopping 5% q/q annualised in Q3 14, boosted by strong private

consumption and business investments. Although we expect the pace of growth to moderate

from this level, we remain positive on the outlook for the US economy this year. The drop in

oil prices is giving a substantial boost to real spending power for the US consumer and

incomes are further supported by improvement in the labour market. With continued low

interest rates, held down by global monetary easing, the backdrop for both residential and

non-residential investment is favourable and we look for growth to remain above trend

throughout this year.

Monetary policy and the money market

At the December FOMC meeting, Chairman Yellen strongly suggested that the Fed would

not hike rates at the next two FOMC meetings (January and March). Apart from this, the

tone of the press conference was more hawkish than expected and the key takeaway is that

rate decisions will be data dependent. If we are right in our economic forecast for the

coming six months, the unemployment rate should reach 5.5% by June, which is close to the

FOMC’s projection of the long-term natural level. At this time, we expect the FOMC to be

confident enough in the recovery to hike the Fed funds rate by 25bp. This will mark the start

of the hiking cycle and we look for further two rate hikes this year. On the back of this

expectation, we expect a significant increase in 3M USD Libor fixings over the coming

year. The forecast for the fixing is well above forwards.

Yield curve

Recently, we advocated that US rates would move higher, mainly in the 2-5Y area on the

back of Fed rate hikes drawing closer and that the curve would flatten given the support to

the 10-year segment. While the curve flattening should continue as the Fed initiates a rate

hiking cycle this summer, we believe the recent move has happened too rapidly. Hence, if

rates rebound again in the coming months it is likely to cause a parallel upward shift of the

curve, i.e. there is a bit more upside to long-end rates now with ten-year Treasury yields

around 2%. The forecasts for US rates are above forwards on all maturities.

3M USD Libor rates 10Y USD swap rates


Forecast summary


USD swap curve


USD Spot +3m +6m +12m

FED 0.25 0.25 0.50 1.00

3M 0.25 0.46 0.74 1.32

2-year 0.43 0.90 1.20 1.80

5-year 1.18 1.90 2.20 2.70

10-year 1.72 2.20 2.50 3.00

2-year 0.71 1.10 1.40 2.00

5-year 1.44 2.05 2.35 2.85

10-year 1.95 2.35 2.65 3.15

Swap rates

Money market

Government bonds

-40-35-30-25-20-15-10-505

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0 3 6 9 12 15 18 21 24 27


% bp


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UK forecasts


The relatively downbeat figures on the UK economy over autumn 2014 in our view conceal

that a recovery is already unfolding in the UK; although PMIs have come off somewhat of

late, all remain in expansionary territory. Notably, we look for the UK to see a positive

spillover from a lower oil price and the eurozone rebound that we envisage for H2.

Inflation has declined rapidly in recent months to 0.5% y/y in December, the lowest rate

since May 2000. The deceleration in consumer prices is due primarily to lower oil prices and

we expect headline inflation to fall further in coming months. Given recent developments in

oil price, headline inflation could temporarily fall below zero in Q1.


A subdued inflation outlook and a weaker global backdrop have made the Bank of England

(BoE) keen to tone down rate hike expectations. Notably, the MPC was quite dovish in its

November Inflation Report. Overall, the timing of the first rate hike remains conditional

entirely on incoming data but the recent soft stance from the BoE suggests it is much less

likely it will raise rates before H2 15. We still look for the first hike to arrive in Q3,

probably in connection with the August Inflation Report. UK yields have declined

substantially over the past month, reflecting weaker inflation and growth expectations.

However, we stress that low headline inflation is not in itself crucial in relation to the

MPC’s policy decision but rather it is the medium-term inflation outlook and wage growth

that matter. Hence, in our view, markets are pricing the BoE too dovishly, with the first hike

priced in for Q2 16.

Yield curve

In the light of the recent decline in interest rates, we have lowered our forecasts on the 5Y

and 10Y tenors. However, we still see potential for higher yields in 2015 and we have raised

our 6-12M forecast for 2Y rates as future BoE interest rate increases move closer. Hence,

we expect the UK yield curve to flatten further, with rates rising most in the 0-5Y segment.

Our forecasts are above forwards on all maturities and we still expect UK yields to widen

versus the EUR.

3M GBP Libor rates 10Y UK swap rates


Forecast summary


GBP swap curve


GBP Spot +3m +6m +12m

Base rate 0.50 0.50 0.50 1.00

3M 0.56 0.55 0.75 1.10

2-year 0.38 0.70 1.00 1.40

5-year 0.96 1.25 1.55 2.00

10-year 1.47 1.75 1.90 2.30

2-year 0.84 1.10 1.40 1.75

5-year 1.25 1.50 1.75 2.20

10-year 1.60 1.85 2.00 2.40

Swap rates

Money market

Government bonds

-40

-30

-20

-10

0

10

0.5

1.0

1.5

2.0

2.5

0 3 6 9 12 15 18 21 24 27


% bp


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Denmark forecast


Growth in Q3 14 accelerated to 0.4% q/q and it looks as though there was decent growth in

Q4 as well. Employment is also picking up. We are becoming more confident that the

economy is getting better, driven by both foreign and domestic demand and helped by the

drop in oil prices. However, risks remain, not least from weak business confidence. Energy

is dragging inflation down and it will drop further in January, but should then turn around

and remain above inflation in the euro area.

Monetary policy and money markets

Against our expectations, Danmarks Nationalbank (DN) did not cut its interest rates ahead

of the New Year. Indeed, DN did not intervene in the FX markets in December to weaken

DKK even as EUR/DKK dropped below 7.435 for a short period – a level where we would

have thought an intervention would be made. Large tax payments have and are expected to

continue to weigh on liquidity in the DKK money market in the coming months.

Consequently, banks have significantly increased the loans on the one-week facility at the

central bank to counter the liquidity drain.

Given the current level of EUR/DKK significantly below the central rate following the

move from SNB and with the ECB expected to boost EUR liquidity, we still see a case for

further monetary easing in Denmark. However, we note that the easing may come in various

forms: 1) FX intervention purchases and a cut of the rate of interest certificates of deposits

(CD rate), 2) a cut of the lending rate, as banks have increased borrowing from the central

bank, 3) use of extraordinary lending facilities as announced on 16 December 2014 – link.

Given the current circumstances, we see the most likely outcome as a symmetric rate cut in

the CD and the lending rates by 10bp to minus 0.15% and +0.10% on a three-month time

horizon and an additional cut in the CD rate by 10bp to minus 0.25% on 12M horizon. We

expect 3M Cibor to edge down towards 0.10%.

Yield curve

Given the outlook for continued tight liquidity in Denmark in the coming months, this might

add a bit of upward pressure on DKK-EUR/interest rate spreads. However, the spreads are

already elevated so further widening should be limited. On a 6-12M horizon the spreads

should be able to narrow a bit. Overall, the forecasts for Danish rates are below forwards for

all maturities below 5Y and close to forwards for longer tenors.

3M Cibor Rates 10Y DKK swap rates


Forecast summary


DKK swap curve


DKK Spot +3m +6m +12m

REPO 0.20 0.10 0.10 0.10

3M 0.25 0.20 0.19 0.10

2-year -0.10 -0.02 -0.04 -0.04

5-year 0.07 0.05 0.10 0.25

10-year 0.66 0.88 0.91 1.04

2-year 0.38 0.35 0.35 0.35

5-year 0.58 0.55 0.50 0.6010-year 1.03 1.10 1.15 1.30

Swap rates

Money market

Government bonds

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

0.0

0.5

1.0

1.5

2.0

0 3 6 9 12 15 18 21 24 27


% bp

http://www.nationalbanken.dk/en/pressroom/Pages/2014/12/DNN201421504.aspx


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Sweden forecast


Political turmoil has characterised Sweden for a while. A new election to be held in March

was announced in November, only to be withdrawn in December after an agreement

between the government and the alliance parties that basically ensures that the government’s

future budget will be passed. This means that some of the proposals for higher taxes that

were rejected in November might come back in a supplementary budget in April but all this

is subject to considerable uncertainty. Recent data have not changed the picture of the

Swedish economy in any meaningful way. It is a two speed performance where

manufacturing and exports show no signs of regaining momentum, while services producers

do much better. In an updated macro forecast, Danske Bank recently lowered the GDP

estimate for 2015 to 1.7% (previously 2.4%) due to sustained sluggishness in manufacturing

and exports. In Sweden gasoline prices have declined a lot as well, which is a positive factor

for consumers’ real income. Nonetheless, compared with previous several years’ reductions

in income taxes, the ‘gasoline effect’ should be limited.


Our baseline scenario is that the Riksbank will keep the repo rate on hold at zero throughout

2016. The Riksbank board mentions the possibility to lower the repo rate below zero and/or

boosting the balance sheet by adding liquidity to the banking system. Outright FX

intervention is of course a tool that is available but the board seems unanimous in its stance

that such a measure is the last line of defence. The ongoing decline in the oil price could

once again push down inflation below the Riksbank’s current forecast but we do not think

that this will be enough to trigger unconventional policies at this stage.

Yield curve

One of our main themes last year was outperformance of the mid-segment (5-year) of the

yield curve, as a low-for-long monetary policy was gradually embedded in market

expectations. We expected that the ‘hunt-for-yield’ would make investors move further out

the curve towards the 5-year segment. Hunt-for-yield remains a driving force, the repo rate

has been slashed to zero and is expected to stay there for quite some time and 5-year yields

have come down significantly. The front-end is not likely to move anywhere unless

unconventional policies turn out to be a fact after all. Compared with the Euroswap curve,

the Swedish curve is steep between 5- and 10-years. We now think it is time for the 10s to

outperform.

3M Stibor rates 10Y SEK swap rates


Forecast summary


SEK swap curve


SEK Spot +3m +6m +12m

Repo 0.00 0.00 0.00 0.00

3M 0.21 0.25 0.25 0.30

2-year 0.00 -0.05 -0.05 -0.05

5-year 0.29 0.35 0.40 0.50

10-year 0.76 0.65 0.70 0.80

2-year 0.19 0.25 0.25 0.25

5-year 0.52 0.65 0.70 0.85

10-year 1.08 0.95 1.00 1.10

Swap rates

Money market

Government bonds

-35

-30

-25

-20

-15

-10

-5

0

0.0

0.5

1.0

1.5

2.0

2.5

0 3 6 9 12 15 18 21 24 27

Change,bp (rhs) 15/12/2014 15/01/2015

% bp


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Norway forecast


The sharp drop in the oil price is expected to result in a bigger drop in oil investments than

previously expected, which would pull down growth this year. However, we expect a much

weaker NOK to significantly soften the blow from the lower oil price and oil investments.

We believe unemployment will climb but that it will be limited by economic adaptation and

a flexible labour market. The big unknown is how the slide in the oil price will affect the

confidence of consumers, businesses, banks and other economic agents in Norway. We look

for mainland-GDP growth of 1.8% y/y in 2015 down from 2.6% in 2014.


Norges Bank cut its policy rate by 25bp at its December meeting, indicating at the same

time a roughly 50/50 chance of a further cut before the summer. The cut was made as a

hedge against economic developments deteriorating significantly on the back of the slide in

the oil price. Therefore, it may appear that movements in the oil price will be the deciding

factor in whether Norges Bank lowers interest rates further and. The oil price is currently

down close to USD50/bbl, whereas Norges Bank based its projections on a USD70/bbl

price. This clearly points to the bank reducing its policy rate again as early as March. We

believe the market might price in two more rate cuts after the March meeting but our official

view – given our macroeconomic forecasts – is that the March cut will be the last rate cut in

this cycle, although risks are clearly skewed to the downside.

Yield curve

Norwegian swap rates have fallen dramatically since the December rate cut by Norges Bank

and the market is now pricing in more than two additional rate cuts in 2015. We believe this

aggressive pricing will continue for the next six months but eventually a correction should

be expected if rates are cut only once this year. 10y swaps have tightened versus EUR swaps

over the past six months. We believe this tightening will continue on a three- to six-month

horizon.

3M Nibor rates 10Y NOK swap rates


Forecast summary


NOK swap curve


NOK Spot +3m +6m +12m

ON DEP 1.25 1.00 1.00 1.00

3M 1.41 1.20 1.20 1.20

2-year 1.44 1.40 1.50 1.60

5-year 0.85 0.80 0.90 1.10

10-year 1.38 1.35 1.55 1.85

2-year 1.04 1.00 1.00 1.10

5-year 1.23 1.10 1.30 1.50

10-year 1.76 1.70 1.90 2.25

Swap rates

Money market

Government bonds

-20

-15

-10

-5

0

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

0 3 6 9 12 15 18 21 24 27

Change,bp (rhs) 15/12/2014 15/01/2015

% bp


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Forecast table

Forecast table


Horizon Policy rate 3m xIbor 2-yr swap 5-yr swap 10-yr swap 2-yr gov 5-yr gov 10-yr gov

Spot 0.25 0.25 0.71 1.44 1.95 0.43 1.18 1.72

+3m 0.25 0.46 1.10 2.05 2.35 0.90 1.90 2.20

+6m 0.50 0.74 1.40 2.35 2.65 1.20 2.20 2.50

+12m 1.00 1.32 2.00 2.85 3.15 1.80 2.70 3.00

Spot 0.05 0.06 0.13 0.29 0.71 -0.16 -0.05 0.45

+3m 0.05 -0.02 0.15 0.25 0.80 -0.10 -0.05 0.60

+6m 0.05 -0.02 0.15 0.25 0.85 -0.10 0.00 0.65

+12m 0.05 -0.02 0.15 0.40 1.00 -0.10 0.15 0.80

Spot 0.50 0.56 0.84 1.25 1.60 0.38 0.96 1.47

+3m 0.50 0.55 1.10 1.50 1.85 0.70 1.25 1.75

+6m 0.50 0.75 1.40 1.75 2.00 1.00 1.55 1.90

+12m 1.00 1.10 1.75 2.20 2.40 1.40 2.00 2.30

Spot 0.20 0.25 0.38 0.58 1.03 -0.10 0.07 0.66

+3m 0.10 0.19 0.35 0.55 1.10 -0.02 0.05 0.88

+6m 0.10 0.18 0.35 0.50 1.15 -0.04 0.10 0.91

+12m 0.10 0.10 0.35 0.60 1.30 -0.04 0.25 1.04

Spot 0.00 0.21 0.19 0.52 1.08 0.00 0.29 0.76

+3m 0.00 0.25 0.25 0.65 0.95 -0.05 0.35 0.65

+6m 0.00 0.25 0.25 0.70 1.00 -0.05 0.40 0.70

+12m 0.00 0.30 0.25 0.85 1.10 -0.05 0.50 0.80

Spot 1.25 1.41 1.04 1.23 1.76 1.44 0.85 1.39

+3m 1.00 1.20 1.00 1.10 1.70 1.40 0.80 1.35

+6m 1.00 1.20 1.00 1.30 1.90 1.50 0.90 1.55

+12m 1.00 1.20 1.10 1.50 2.25 1.60 1.10 1.85

NO

KD

KK

SE

K

Note: * German government bonds are used, EUR swap rates are used

US

DE

UR

*G

BP


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Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’).

The authors of the research report is Lars Tranberg Rasmussen (Senior Analyst).

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