The 3Y liquidity tenders carried out in December and February have brought significant relief to financial markets and caused a further decline in volatility.
There has been selective performance in periphery bonds despite the Greek default, underpinning that the markets are now insulated from the developments in Greece.
The risk of a severe global economic downturn has declined. Global macro data have improved and in the US it appears the recovery is broadening.
The long end in the EUR and USD swap markets has stabilised and rates have moved slightly higher. The 2-10s curves have steepened somewhat.
We expect the ECB to keep rates on hold until 2014. The 3Y liquidity tenders will support lower Euribor fixings and keep a lid on short-end rates. We expect to see a moderate increase in the longer dated EUR swap rates and thus expect a steeper curve.
In the US we expect the Fed to remain on the sidelines for now, as the economy is recovering. Although the Fed will be on hold for a very long time, we believe that there is room for higher money market forward rates over the next 12 months. We project higher longer dated US rates on all forecast horizons and steeper curves.
We expect the Bank of England to lift the asset purchase target again in May, either by GBP50bn or GBP25bn. The latter would be to signal a soft landing. Rate hikes are not on the agenda before 2014.
The general risk sentiment has improved over the past month and EUR/DKK has moved a little higher lowering the chance of a new independent Danish rate cut in the near term. Our main scenario is still that the repo rate will remain unchanged at 0.70% throughout 2012, although there is still a risk of a new rate cut.
The Riksbank decided to cut the repo rate by 25 basis points at the February policy meeting and (again) showed a rate forecast of unchanged policy over the coming year or so. Meanwhile, the market is currently more or less pricing in a full 25bp cut in April and we are in agreement with this. We believe that the bond curve will gradually steepen during the course of next year.
We had expected Norges Bank (NB) to leave policy rates unchanged in March. However, the recent appreciation of the Norwegian krone has made NB sufficiently nervous to trigger another rate cut of 25bp to 1.5%, According to the renewed interest rate path from NB, the first hike is planned in Q2 13. However, based on the continued improvement in the key figures, we still expect NB to hike rates earlier than this.