Review

  • International yields have in general declined. The 3yr ECB liquidity tender has flooded markets with liquidity, leading to some relief over the past month.
  • Periphery bonds have seen strong performance and bond auctions so far went well this year. The corporate issuance window has reopened causing tighter swap spreads.
  • In Europe the decline in rates has been much in line with our forecasts and we have reached our 3M forecasts on German Bunds and 10yr EUR swap rates.
  • The S&P downgrade of France, Austria and several other EMU member states was largely priced into the markets and did not cause panic.

International rates

  • We look for no further cuts from the ECB, but downside risks persist. We continue to see downside to the short-end of the EUR swap curve, since we expect the money market fixings to continue to decline. Lower money market fixings in the US should keep two-year swap rates low in the US too in the coming months.
  • In the US we think that the ongoing recovery in macroeconomic data will support a trough in long-dated rates. We therefore expect gradual rising long-dated USD swap rates in the next three months, which should rub off on GBP rates. Meanwhile we ex-pect long-dated EUR rates to stay range bound the next three months.
  • Down the road we expect long-dated rates to rise more, and we see decent potential for steeper 2-10 slopes in USD, GBP and eventually EUR rates. Biggest risks to our forecast would be another escalation of the euro debt crisis causing market panic.

Scandi rates

  • We believe that the Danish central bank will keep its policy rates unchanged going forward. However, we cannot rule out further independent cuts in the repo rate should inflows accelerate again. We expect Cibor fixings to resume their downtrend, but at a slower pace than recently seen and at a slower pace than the pace of the decline in Euribor fixings.
  • We believe that the Riksbank will lower growth estimates and the rate forecast in February and deliver another rate cut. A combination of lower short rates and, eventu-ally, somewhat higher long-dated rates will render the bond curve steeper.
  • Norges Bank decided to cut the deposit rate aggressively by 50bp in December to 1.75% to accommodate rising financial tensions and weaker economic outlook. We do not expect further cuts. We expect the Norwegian 2-10 swap curve to steepen over the course of 2012.