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17 Apr 2015
US blip temporary, EUR/USD spread to widen - DB
FXStreet (Guatemala) - Arne Lohmann Rasmussen, analyst at Danske Bank A/S noted that European government bond yields have continued to fall as the ECB purchase programme continues unabated.
Key Quotes:
"The programme has already pushed the average German yield below zero and German bonds with a maturity up to nine years are now trading in negative territory and bonds with a maturity up to five years are trading with a negative yield below 20bp, which is the threshold level for ECB buying."
"We believe the trend for lower EUR rates and yields will continue for the rest of 2015, albeit at a somewhat slower pace than seen so far in 2015. The ECB has basically created a bond ‘scarcity premium’, which we expect to continue to flatten the curve and we expect new record lows over the next three to six months. We now forecast that 10Y German bond yields will fall to zero, or even below, over the next couple of months. We expect the move lower in EUR yields irrespective of our more positive view on the eurozone economy and inflation outlook. Although we forecast that US yields will rise, we expect this to have little impact on EUR rates in the near future."
"US yields have also moved lower recently as the market has postponed the timing of the first Fed hike due to the weaker-than-expected key numbers for Q1."
"We believe the Q1 weakness in US data will be temporary and that growth will be above trend for the rest of 2015. Hence, we still expect the Fed to start its hiking cycle this year. We pencil in the first hike in September 2015, followed by a second rate hike in December."
"For 2016 and 2017, we forecast a gradual hiking pace of 100bp on average. Therefore, we project a significant rise in US rates in the 2Y-5Y segment, while we expect long rates to be kept more in check by investor demand and a market that is not ready to price in an aggressive hiking path given still modest global inflation pressure. Hence, we expect further flattening of the curve 2s10s, 5s10s and 10s30s in the US. Our forecasts imply that we continue to expect a further widening of the EUR/USD rate spread."
Key Quotes:
"The programme has already pushed the average German yield below zero and German bonds with a maturity up to nine years are now trading in negative territory and bonds with a maturity up to five years are trading with a negative yield below 20bp, which is the threshold level for ECB buying."
"We believe the trend for lower EUR rates and yields will continue for the rest of 2015, albeit at a somewhat slower pace than seen so far in 2015. The ECB has basically created a bond ‘scarcity premium’, which we expect to continue to flatten the curve and we expect new record lows over the next three to six months. We now forecast that 10Y German bond yields will fall to zero, or even below, over the next couple of months. We expect the move lower in EUR yields irrespective of our more positive view on the eurozone economy and inflation outlook. Although we forecast that US yields will rise, we expect this to have little impact on EUR rates in the near future."
"US yields have also moved lower recently as the market has postponed the timing of the first Fed hike due to the weaker-than-expected key numbers for Q1."
"We believe the Q1 weakness in US data will be temporary and that growth will be above trend for the rest of 2015. Hence, we still expect the Fed to start its hiking cycle this year. We pencil in the first hike in September 2015, followed by a second rate hike in December."
"For 2016 and 2017, we forecast a gradual hiking pace of 100bp on average. Therefore, we project a significant rise in US rates in the 2Y-5Y segment, while we expect long rates to be kept more in check by investor demand and a market that is not ready to price in an aggressive hiking path given still modest global inflation pressure. Hence, we expect further flattening of the curve 2s10s, 5s10s and 10s30s in the US. Our forecasts imply that we continue to expect a further widening of the EUR/USD rate spread."