DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.
The year 2017 was characterised by very supportive conditions for the eurozone rates market against the background of weak inflation and substantial ECB support. German 10 year bond yields ended the year broadly where they started: at extremely low levels. ASW spreads finished the year broadly where they started: at extremely rich levels. At the same time, country spreads declined as they shook off political risk and learned to love the economic recovery (and the PSPP!). Will 2018 be similarly supportive?
To answer that question we set out three key themes that we think will drive the eurozone rates market. The key issue is whether underlying inflationary pressures will turn up – hence we think ‘Is Inflation Dead?’ remains the big question. Other important themes are the outlook for the ECB’s monetary policy and eurozone bond supply dynamics. In addition, we set out our key views for eurozone outright yields, curve spreads and country yield spreads.
As a sneak preview, our overall judgement is that the environment will still be supportive for the rates market but less so than in 2017. Why supportive? Well we think underlying inflationary pressures will remain subdued, while the ECB will remain in the market for a while. Why less so? ECB public sector bond purchases will slow significantly and towards the end of the year, the first ECB rate hike will come into view on the one year horizon.ABN-AMRO-Euro-Sovereign-Playbook-2018.pdf (2 MB)