Investment Research — General Market Conditions
17 May 2017
Yield Outlook
Range trading for the rest of 2017 but higher yields in 2018




While we continue to see further upside for 10Y German Bund yields on a 12M horizon,
we expect no major changes in 2017. This is also the case for Swedish, Danish and
Norwegian yields. Range trading for the rest of 2017 is our call.
Quick links
We do not expect the market to price an ECB tapering premium before 2018, as
continued low inflation and a slightly less strong growth outlook are removing the need
for tighter ECB monetary policy. We also expect the ECB to prolong its purchase
programme into 2018.
US forecasts
In the US market, not only Fed hikes but also a possible change in the Fed’s
reinvestment policy will set the direction for yields. We see slightly higher US yields
on a six-month horizon but again higher yields are mainly a 2018 story.
Sweden forecasts
Eurozone forecasts
UK forecasts
Denmark forecasts
Norway forecasts
Forecasts table
We expect the 10Y Bund yield to rise to 0.90% and the 10Y US Treasury yield to 3.0%
on a 12-month horizon.
Asymmetric risk to yields and rates
In Yield Outlook: More or less stable yields in 2017 – higher yields a 2018 story, 20 April,
we argued that bond yields would more or less range trade for the rest of 2017 with a slight
risk on the upside but that higher yields would mainly be a story for 2018.
We keep this view of the market in this update, though we stress the risk remains
asymmetrical. Hence, the risk of a more substantial rise in yields over the next three to six
months is clearly greater than the risk of a significant new move lower in yields.
Policy rate outlook
Country
Spot
+3m
+6m
+12m
USD
EUR
GBP
DKK
1.00
-0.40
0.25
-0.65
1.25
-0.40
0.25
-0.65
1.25
-0.40
0.25
-0.65
1.75
-0.40
0.25
-0.65
SEK
NOK
-0.50
0.50
-0.50
0.50
-0.50
0.50
-0.50
0.50
Source: Danske Bank Markets
Politics moving down the agenda
The French election is now behind us and like the Dutch election earlier in the year, the
result underlined that despite the UK Brexit decision and the election of Donald Trump,
European voters are not ready to put anti-establishment, anti-EU and anti-euro parties in
power.
The results are taking away the fear of an early election in Italy and the first Ländern results
in Germany have shown surprisingly strong support for Angela Merkel and her CDU party.
All in all, the European political landscape now looks much more stable than it did just a
few months ago and the politically driven safe-haven support for, in particular, the German
government bond market and the Scandinavian fixed income markets is now abating.
10-year swap rate outlook
Country
USD
EUR
GBP
DKK
SEK
NOK
Spot
2.27
0.85
1.21
1.10
1.13
1.92
+3m
2.35
0.85
1.25
1.10
1.15
1.90
+6m
2.45
0.95
1.35
1.20
1.10
1.90
Source: Danske Bank Markets
However, in the US, the picture might be changing. The market is losing faith in
Trumponomics and focus is increasingly on the risk of Trump becoming a lame duck not
able to fulfil his ‘growth agenda’. We would no longer rule out Trump being impeached.
Chief Analyst
Arne Lohmann Rasmussen
+45 45 12 85 32
[email protected]
Assistant Analyst
Nina T. B. Andersen
+45 45 12 82 87
[email protected]
Important disclosures and certifications are contained from page 13 of this report.
www.danskeresearch.com
+12m
3.00
1.30
1.75
1.55
1.40
2.30
Yield Outlook
Focus now turns to economics, central banks and geopolitics
With less focus on European politics, financial markets are likely to look for new drivers
and we argue three themes will take the limelight over the next three to six months: (1) the
economic cycle, (2) the ECB and Federal Reserve and (3) geopolitics.
1. The global recovery is less strong
The global and synchronised economic recovery has continued and growth overall was
strong in Q1, particularly in the eurozone, where growth came in at 0.5% q/q in Q1 after
growing at the same speed in Q4 16. Especially encouraging was the pickup in growth rates
in Spain and Portugal to 0.8% q/q and 1.2% q/q, respectively. Italy on the other hand
remains the weak spot, with growth at just 0.2% q/q for the second quarter in a row.
However, from a market perspective, it is not necessarily the current economic situation
that is important but the direction of indicators. Here, we argue that the risk of the global
business cycle peaking is growing – not that we are calling a recession or anything but
merely a slowdown in growth rates over the next two quarters compared with Q1. We have
already seen manufacturing indicators in the US and China edging lower. In the case of
China in particular, we see a growing risk of a more severe slowdown.
We know from experience that long yields in particular rarely move higher if
indicators have peaked. Hence, the push for higher yields from the global cycle seen
since October 2016 could now be less pronounced.
Despite few spare resources in the
German economy, wage growth
remains muted
We could apply the same argument to the inflation outlook. Inflation in the eurozone came
in at 1.9% in April and core inflation was 1.2% y/y – the highest level since June 2013.
However, we doubt we will see higher wage growth, which is needed to bring core inflation
closer to 2% on a more sustained basis. Furthermore, the surge in headline inflation is due
mainly to higher energy prices and temporary factors such as higher food prices due to bad
weather in southern Europe and Easter being in different months in 2017 and 2016. These
factors all added to inflation rates in April.
Source: Macrobond Financial, Danske Bank
Again, the market implication is that the push for higher yields from higher inflation
is behind us, as inflation seems to have peaked for now.
It seems that the synchronic recovery in the global economy
is becoming less strong…
…and furthermore we might have seen the peak in Euro zone
inflation
Source: Macrobond, Danske Bank
Source: Macrobond, Danske Bank
2. The central banks might be cautious
Central bank action from the ECB and the Federal Reserve are important factors for the
fixed income outlook.
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Yield Outlook
In the eurozone, focus now turns to the June ECB meeting on 8 June. The ECB is likely to
express a less dovish stance this time. The market has a lot of focus on whether or not the
ECB will remove the reference to rates being ‘lower’. We are not sure whether this will be
the case or whether it will apply some other change in communication.
However, importantly, the market should be prepared for a slightly more upbeat ECB but
given the outlook for still-low inflation and our view that we will not see a sustained pickup
in wage growth, we do not expect to see a signal of QE tapering or early rate hikes, as the
ECB is likely to continue to argue that a substantial degree of monetary accommodation is
needed.
At the meeting in September, we expect the ECB to announce a third QE extension of
EUR40bn per month going into 2018.
Overall, we do not expect a pronounced reaction in the fixed income market to the
ECB meeting. However, that said, the risk has become more asymmetric and the ECB
could trigger a move higher in yields earlier than we have stated in our yield forecasts.
The short-term story about the Federal Reserve is very much whether or not the Fed will
hike in June. While this is consensus among analysts and is 70% priced in by markets, we
are more sceptical given the mixed economic data and not least weak inflation prints.
It is not because we expect the Fed to pause its hiking cycle, we just expect the Fed to wait
until July and in June take the opportunity to announce the triggers for starting the reduction
of its balance sheet (‘quantitative tightening’) instead. Hence, short term, the Fed should
not be a trigger for higher yields.
However, again, as with the ECB, the risk has become more asymmetric and the risk is that
the Fed puts less focus on inflation and more focus on the low unemployment rate.
Besides a summer hike, we expect the Fed to hike again in December and three to four
times in 2018 (depending on the Fed’s strategy for quantitative tightening). Markets have
priced in a total of 2.7 hikes from now until year-end 2018. We forecast that US yields will
range-trade more or less for the next three to six months, before moving higher again on a
12-month horizon. We expect US 10Y Treasury yields to trade at 3% in 12M.
3. Geopolitics is a joker
It is by nature difficult to take geopolitics into account when making forecasts. However,
it is obvious to us that North Korea is already a big unknown in global geopolitics and will
continue to be so over coming years. In The rising risk from North Korea – and what it
means for markets, 27 April, we took a closer look at the threat from North Korea.
In respect of global fixed income, we conclude the following.
‘A clear escalation of the situation into a military conflict is likely to trigger safe-haven
flows into global fixed income. Even though the US would probably be a participant in a
potential conflict, we would expect the US Treasury market to be the main beneficiary due
to its sheer size and as the market will be able to price out future Fed hikes. We would
expect the Fed to go on hold and stand ready to provide support if needed. In Europe,
mainly core government bond markets including Scandi markets would be likely to benefit.
Global central banks will stand ready to provide especially USD liquidity in case the
functioning of the interbank market is impaired. We could see 10Y Bund yields below zero
and 10Y US Treasury yields well below 2.0%.’
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17 May 2017
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Yield Outlook
Hence, global geopolitics and not least fear hereof is also working as drag on yields capping
any strong upside. Note that our forecasts do not assume a strong escalation in the conflict
with North Korea.
Asymmetric risk to yields but range trading for 2017 is our
call…
Despite the higher inflation over the past couple of months, the continued recovery in
eurozone growth in particular and the risk of both the ECB and the Fed becoming more
hawkish, we stick to our view that 10Y bond yields in Germany, Scandinavia and the US
will remain in a narrow range around the current level for the rest of 2017.
However, in 2018, we expect the picture to change. In our view, the ECB will have started
its tapering and the Fed will be on course for further rates hikes. That said, the ECB still
has a tight grip on the short end of the curve, as rate hikes are still not imminent and we
still call for a steeper 2Y10Y curve in 2018.
We expect higher 10Y EUR yields to materialise primarily on a 12M horizon, and target
EUR swap rates at 1.30% and 10Y German yields at 0.90% on a 12M horizon.
However, the risk to yields for the rest of 2017 remains asymmetric, if we disregard the
risk of a severe escalation of the conflict with North Korea.
We might have read the ECB wrongly. The ECB might test the market to see whether a
more hawkish stance is prudent and possible. The same goes for the Federal Reserve. The
fall in the unemployment rate to 4.4% might change the focus at the central bank away
from the ‘low’ current inflation prints to the risk of accelerating wage growth. We might
also have underestimated the impact of a possible Fed decision to change its reinvestment
policy.
We might also be wrong on the economic outlook and put too much weight on the apparent
peak in the economic indicators. We might have underestimated the momentum in
eurozone growth. The same goes for inflation in the eurozone. We forecast that inflation
and, not least, core inflation will peak here in Q2 based on the view that wage growth will
stay low. If we are wrong on this assumption, it is likely we are also wrong on the
assumption that yields will not rise before 2018. We could also be wrong in forecasting
only modestly higher oil prices.
…but it will be hard to avoid higher yields in in 2018
Even though we are not calling for any significant further increase or fall in yields in 2017,
we think the outlook is somewhat different if we look 12 months ahead and into 2018.
It is still our view that the Fed will hike rates twice in the second part of 2017. On top of this,
a discussion regarding the Fed balance sheet may also start to dominate the agenda in Q1 18.
Ending the reinvestment could be seen as negative for the bond market.
However, we expect market attention also to be on the ECB. Market focus is set to be on
whether the ECB will taper (scale down) its bond purchases or cease its purchases altogether.
Remember, US Treasury yields rose significantly in 2013 when the Fed announced the
tapering of its QE programme. The discussion of the timing of a possible first rate hike is
likely to be lively when we look ahead to Q1 18.
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Yield Outlook
Contents and contributors
Eurozone .......................................................................................................................................................................................................................................................................6
Macro
Senior Analyst
Pernille B. Henneberg
Interest rates
Chief Analyst
Arne Lohmann Rasmussen +45 45 12 85 32
+45 45 13 20 21
[email protected]
[email protected]
US .......................................................................................................................................................................................................................................................................................7
Macro & interest rates
Senior Analyst
Mikael Olai Milhøj
+45 45 12 76 07
Interest rates
Chief Analyst
Arne Lohmann Rasmussen +45 45 12 85 32
[email protected]
[email protected]
UK .......................................................................................................................................................................................................................................................................................8
Macro & interest rates
Senior Analyst
Morten Helt
+45 45 12 85 18
[email protected]
Denmark ........................................................................................................................................................................................................................................................................9
Macro
Chief Economist
Las Olsen
+45 45 12 85 36
Interest rates
Chief Analyst
Arne Lohmann Rasmussen +45 45 12 85 32
[email protected]
[email protected]
Sweden ....................................................................................................................................................................................................................................................................... 10
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 ....................................................................................................................................................................................................................................................................... 11
Macro & interest rates
Chief Analyst
Jostein Tvedt
+47 23 13 91 84
[email protected]
Forecasts table .................................................................................................................................................................................................................................................... 12
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17 May 2017
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Yield Outlook
Eurozone forecasts

The ECB is likely to express a less dovish stance at the upcoming meeting in June but
this should not be a signal of QE tapering or rate hikes, as the ECB continues to argue
that a substantial degree of monetary accommodation is needed. We expect the ECB to
announce at its meeting in September a third QE extension of EUR40bn per month
going into 2018. After QE has ended, we expect any rate hikes to have a long time
horizon.

Headline and core inflation have recently been volatile due to Easter effects but looking
ahead, headline inflation should trend down towards 1.0% at the beginning of 2018 as
the strong support from the oil price fades. A linchpin for higher core inflation is higher
wage pressure but a number of factors point to continued low wage pressure.

We continue to expect a steeper EUR yield curve for the 2Y10Y in 2018. The ECB still
has a tight grip on the short end of the curve, especially as it is now buying below the depo
rate at -0.4%. However, this is not the case for the 10Y segment of the curve, which we
expect to be pushed up by higher US yields and a market slowly pricing in a greater
probability of the ECB tapering QE purchases in 2018. This is mainly a theme on a 12M
horizon.
EUR forecasts summary
EUR swap curve – one-month change
16/05/2017
EUR
--- Forecast --Spot
+3m
+6m
Refi
0.00
0.00
0.00
3M
-0.33
-0.35
-0.35
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
2.0 %
bp 30
1.5
Money market
0.00
-
-
-
-0.35
-2
-4
-12
1.0
0.5
Government bonds
2-year
-0.66
-0.70
-0.60
-0.50
-
-
-
5-year
-0.30
-0.35
-0.30
-0.20
-
-
-
10-year
0.44
0.40
0.50
0.90
-
-
-
2-year
-0.14
-0.15
-0.05
0.00
-6
-1
-8
5-year
0.23
0.20
0.25
0.30
-9
-10
-18
10-year
0.85
0.85
0.95
1.30
-5
-1
+23
Swap rates
0.0
-0.5
0
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
18-Apr-17
Source: Danske Bank Markets
Source: Danske Bank Markets
3M Euribor
10Y EUR swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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17 May 2017
25
20
15
10
5
0
-5
16-May-17
www.danskeresearch.com
Yield Outlook
US forecasts

The next uncertainty is whether or not the Fed will hike in June. While this is consensus
among analysts and is 70% priced in by markets, we are more sceptical given the
weaker economic data and weak inflation prints. It is not because we expect the Fed to
pause its hiking cycle but we expect the Fed to wait until July and instead take the
opportunity to announce the triggers in June for starting the reduction of its balance
sheet (‘quantitative tightening’). That said, we will have to listen carefully to the
upcoming Fed speeches for more information about the different views among FOMC
members, which should reveal whether or not we are mistaken.

Besides a summer hike, we expect the Fed to hike again in December and three to four
times next year (depending on the Fed’s strategy for quantitative tightening). Markets
have priced in a total of 2.7 hikes from now until year-end 2018.

We forecast that US yields will mostly range trade over the next three to six months,
before moving higher again on a 12M horizon. We expect US 10Y Treasury yields to
trade at 3% in 12M.
USD forecasts summary
16/05/2017
USD
USD swap curve – one-month change
--- Forecast --Spot
+3m
+6m
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
3.0 %
bp 8
7
6
5
4
3
2
1
0
2.5
Money market
Fed Funds
1.00
1.25
1.25
1.75
-
-
-
3M
1.18
1.57
1.73
2.06
+23
+29
+46
2-year
1.31
1.30
1.50
1.80
-
-
-
5-year
1.87
1.90
2.00
2.30
-
-
-
10-year
2.35
2.40
2.50
3.00
-
-
-
+3
+18
2.0
1.5
Government bonds
Swap rates
2-year
1.54
1.60
1.75
2.05
-3
5-year
1.93
2.00
2.10
2.40
+1
+5
+25
10-year
2.27
2.35
2.45
3.00
+4
+10
+58
1.0
0.5
0.0
0
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
17-Apr-17
Source: Danske Bank Markets
Source: Danske Bank Markets
3M USD Libor rates
10Y USD swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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Yield Outlook
UK forecasts

The UK economy has slowed substantially, with GDP growth down from 0.7% q/q in
Q4 to 0.3% q/q in Q1. The near-term growth outlook remains subdued, as real wage
growth has turned negative, implying less scope for private consumption growth, which
is evident in, among others, the recent plunge in retail sales. CPI inflation rose to 2.7%
y/y in April from 2.3% y/y in March and is now at the highest level since 2013.

The Bank of England (BoE) made no policy changes at its May meeting but maintained
its hawkish twists as Kristin Forbes (a known hawk) still voted for a hike and the
meeting summary stated that the BoE thinks the current market pricing of BoE hikes is
a bit too soft (market is currently pricing in an accumulated 20bp rate hike by the end
of 2018). We still expect the BoE to remain on hold for the next 12 months, as we think
it is unlikely the BoE will tighten monetary policy at a time of elevated political
uncertainty.

In line with yields in both Europe and the US, UK gilt yields have moved lower
recently, which our new forecasts reflect. We expect UK gilt yields to stay at current
levels for now, before eventually moving higher in 6-12M, driven by higher yields in
the US and Europe. We expect the 2Y10Y and 5Y10Y yield curves to steepen, as we
expect the short end of the curve to stay low.
UK forecasts summary
UK swap curve – one- month change
16/05/2017
GBP
--- Forecast --Spot
+3m
+6m
Repo
0.25
0.25
0.25
0.25
-
-
-
3M
0.31
0.31
0.31
0.31
-2
-6
-14
2-year
0.15
0.20
0.20
0.25
+4
+0
-1
5-year
0.56
0.60
0.65
0.85
+1
+1
+9
10-year
1.16
1.20
1.30
1.70
-3
+3
+31
-8
-17
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
Money market
Government bonds
Swap rates
2-year
0.55
0.55
0.55
0.55
-4
5-year
0.82
0.85
0.90
1.10
-1
-1
+11
10-year
1.21
1.25
1.35
1.75
-
+6
+39
1.6 %
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
0
bp 25
20
15
10
5
0
-5
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
17-Apr-17
Source: Danske Bank Markets
Source: Danske Bank Markets
3M GBP Libor rates
10Y UK swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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Yield Outlook
Denmark forecasts

Following the French Presidential election, we have seen a small move higher in
EUR/DKK and the cross has moved away from the ‘intervention zone’ around the
7.4330 level. The slightly weaker krone has pushed the very short end of the Cita curve
marginally higher and the Cita-Eonia and the Cibor-Euribor spread have widened
marginally following the tightening seen earlier in the year. Given that we expect the
ECB to continue with its QE programme throughout 2017 and into 2018, we expect the
pressure for the Danish central bank to intervene in the market to return later in 2017.

DKK swap rates continue to track EUR swap rates closely and we see no strong driver
for this to change in the near future. If anything, we could see a continuation of the
overall trend this year that DKK rates tighten versus the EUR. Danish government
bonds have also tightened marginally versus Germany this year. The Debt Management
Office will continue to conduct switches to support liquidity, especially in the new 2Y
and 10Y bonds. However, the Debt Management Office will also conduct outright
buybacks funded by the booming government account at the central bank.

Our base scenario expects the bond yield spread to Germany and the DKK-EUR swap
spread to stay at the current level or slightly tighter. The Debt Management Office may
lower the supply of Danish government bonds in 2017, adding support to the Danish
bond market. We forecast a steeper curve 2Y10Y in Denmark as in Europe.
DKK forecasts summary
DKK swap curve – one-month change
16/05/2017
DKK
--- Forecast --Spot
+3m
+6m
CD
-0.65
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
Money market
-0.65
-0.65
-0.65
-
-
-
2.0 %
25
1.5
Repo
0.05
0.05
0.05
0.05
-
-
-
3M
-0.23
-0.25
-0.25
-0.25
-3
-6
-16
6M
-0.08
-0.10
-0.10
-4
-8
-18
0.5
2-year
-0.53
-0.45
-0.35
-0.25
-
-
-
5-year
-0.18
-0.25
-0.20
-0.10
-
-
-
0.0
10-year
0.72
0.65
0.75
1.15
Swap rates
-
-
-
2-year
0.05
0.05
0.15
0.20
-4
+0
-7
5-year
0.44
0.40
0.45
0.50
-10
-12
-21
10-year
1.10
1.10
1.20
1.55
-6
-2
+22
-0.10
Government bonds
bp 30
20
1.0
-0.5
15
10
0
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
18-Apr-17
Source: Danske Bank Markets
Source: Danske Bank Markets
3M Cibor rate
10Y DKK swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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Yield Outlook
Sweden forecasts

After the decision at the April meeting to extend QE (albeit in smaller volumes) until
year-end and to postpone expected future rate hikes by three months, we expect the July
meeting to be quite uneventful.

However, later in the year, we expect further downside deviations from the Riksbank's
inflation forecasts. Thus, at the very least, the point where the Riksbank can reduce
stimuli remains distant. As the Riksbank admitted in the most recent minutes from its
previous meeting, the new 3Y central wage agreements will make it significantly more
difficult to reach the inflation target.

In addition, over the summer, we expect flow factors to be supportive for Swedish bond
yields. Net cash flow to investors is likely to be strongly positive and the broad
benchmark bond indices will be extended. Also, the outstanding amount of short-dated
government papers will reach historically low levels. We expect some minor downward
pressure on SEK rates.
SEK forecasts summary
16/05/2017
SEK
SEK swap curve – One month change
--- Forecast --Spot
+3m
+6m
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
Money market
Repo
-0.50
-0.50
-0.50
-0.50
-
-
-
3M
-0.48
-0.48
-0.48
-0.48
-2
+1
-20
2-year
-0.66
-0.70
-0.70
-0.65
-
-
-
5-year
-0.08
-0.20
-0.10
0.10
-
-
-
10-year
0.61
0.50
0.50
0.85
-
-
-
Government bonds
Swap rates
2-year
-0.30
-0.40
-0.40
-0.35
-18
-27
-43
5-year
0.30
0.20
0.25
0.45
-20
-25
-25
10-year
1.13
1.15
1.10
1.40
-5
-17
-2
2.5 %
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0 0
bp 14
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
18/04/2017
Source: Danske Bank Markets
Source: Danske Bank Markets
3M Stibor rate
10Y SEK swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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12
10
8
6
4
2
0
-2
16/05/2017
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Yield Outlook
Norway forecasts

At the 4 May policy meeting, Norges Bank reiterated the message from the Monetary
Policy Report 1/17: no change in the target rate in 2017 from the present 0.50%.
However, the bank’s projections suggest a non-negligible probability of a cut, reflecting
the fall seen in core inflation over the past couple of months.

The strong housing market and the risk to long-term financial stability in the case of a
bursting of a potential housing bubble are the main reasons for Norges Bank to refrain
from cutting the target rate. Recently-introduced mortgage market regulations seem to
be cooling the housing market somewhat. We forecast unchanged central bank rates on
a 12M horizon.

There is an ongoing public and academic debate on the need for a revision of the current
inflation target. The market effects of a potential reform would probably be muted as
the market seems to be discounting moderate inflation already.

We expect 5Y and 10Y yields to be stable versus peers in 2017, as the Norwegian
economy is improving slowly but is still not out of the woods following the oil
investment downturn. The positive outlook could trigger some inflows into the
Norwegian government bond market and tighten the spread to Germany more than we
forecast.
NOK forecasts summary
NOK swap curve – one-month change
16/05/2017
NOK
--- Forecast --Spot
+3m
+6m
Deposit
0.50
0.50
0.50
3M
0.88
0.90
0.90
+12m
--- Fcst vs Fwd in bp --+3m
+6m +12m
Money market
0.50
-
-
-
0.90
-3
-12
-12
Government bonds
2-year
0.65
0.65
0.75
0.80
-
-
-
5-year
1.04
1.00
1.05
1.10
-
-
-
10-year
1.61
1.60
1.60
2.00
-
-
+0
Swap rates
2-year
1.14
1.20
1.30
1.35
+2
+7
5-year
1.48
1.40
1.45
1.50
-13
-13
-20
10-year
1.92
1.90
1.90
2.30
-6
-9
+23
2.3 %
2.1
1.9
1.7
1.5
1.3
1.1
0.9
0.7
0
bp 15
10
5
0
-5
-10
-15
3
6
9 12 15 18 21 24 27
Change,bp (rhs)
18/04/2017
Source: Danske Bank Markets
Source: Danske Bank Markets
3M Nibor rate
10Y NOK swap rates
Source: Macrobond Financial, Danske Bank Markets
Source: Macrobond Financial, Danske Bank Markets
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Yield Outlook
Forecasts table
NOK
SEK
DKK
GBP
EUR *
USD
Forecasts
Horizon
Policy rate
3m xIbor
2-yr swap
2-yr gov
5-yr gov
10-yr gov
Spot
1.00
1.18
1.54
5-yr swap 10-yr swap
1.93
2.27
1.31
1.87
2.35
+3m
1.25
1.57
1.60
2.00
2.35
1.30
1.90
2.40
+6m
1.25
1.73
1.75
2.10
2.45
1.50
2.00
2.50
+12m
1.75
2.06
2.05
2.40
3.00
1.80
2.30
3.00
Spot
-0.40
-0.33
-0.14
0.23
0.85
-0.66
-0.30
0.44
+3m
-0.40
-0.35
-0.15
0.20
0.85
-0.70
-0.35
0.40
+6m
-0.40
-0.35
-0.05
0.25
0.95
-0.60
-0.30
0.50
+12m
-0.40
-0.35
0.00
0.30
1.30
-0.50
-0.20
0.90
Spot
0.25
0.31
0.55
0.82
1.21
0.15
0.56
1.16
+3m
0.25
0.31
0.55
0.85
1.25
0.20
0.60
1.20
+6m
+12m
0.25
0.25
0.31
0.31
0.55
0.55
0.90
1.10
1.35
1.75
0.20
0.25
0.65
0.85
1.30
1.70
Spot
-0.65
-0.23
0.05
0.44
1.10
-0.53
-0.18
0.72
+3m
-0.65
-0.25
0.05
0.40
1.10
-0.45
-0.25
0.65
+6m
-0.65
-0.25
0.15
0.45
1.20
-0.35
-0.20
0.75
+12m
-0.65
-0.25
0.20
0.50
1.55
-0.25
-0.10
1.15
Spot
-0.50
-0.48
-0.30
0.30
1.13
-0.66
-0.08
0.61
+3m
-0.50
-0.48
-0.40
0.20
1.15
-0.70
-0.20
0.50
+6m
-0.50
-0.48
-0.40
0.25
1.10
-0.70
-0.10
0.50
+12m
-0.50
-0.48
-0.35
0.45
1.40
-0.65
0.10
0.85
Spot
0.50
0.88
1.14
1.47
1.92
0.65
1.04
1.61
+3m
0.50
0.90
1.20
1.40
1.90
0.65
1.00
1.60
+6m
0.50
0.90
1.30
1.45
1.90
0.75
1.05
1.60
+12m
0.50
0.90
1.35
1.50
2.30
0.80
1.10
2.00
* German government bonds are used; EUR swap rates are used
Source: Danske Bank Markets
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Yield Outlook
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 are Arne Lohmann Rasmussen, Chief Analyst, and Nina T. B. Andersen
(Assistant Analyst).
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Yield Outlook
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