Euro Rates Watch – Lower-for-longer bond yields expected

by: Kim Liu , Nick Kounis

  • We now expect the ECB to unwind its QE programme over a more prolonged period, while the first deposit hike is only due in 2019
  • The ECB will need to stretch the flexibility of its QE programme as purchases will persistently deviate from the capital key in order to adhere to the issue(r) limits
  • The Fed is expected to pause its rate hike cycle and hike its policy rate twice in 2018
  • We have revised our eurozone and US bond yield forecasts lower for this year to respectively 0.60% and 2.20% and next year to 0.80% and 2.50%
  • The 10y Bund Treasury spread is expected to temporarily tighten at the end of 2017
  • We still expect euro bond curves to steepen (especially in 2s10s and 5s30s) and ASW to tighten, albeit more modestly than before
  • Eurozone country spreads are set to widen, most notably Italian spreads
  • Italian borrowing costs will widen because of a mix of ECB tapering, weak fundamentals and political risk from the elections in 2018
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