Eurozone: A steeper yield curve on a 12M horizon - Danske Bank

Analysts at Danske Bank, continue to expect a steeper 2Y10Y German yield curve. They lowered 12M forecast for German 10Y yields from 1.20% to 1.1% due to the change in the ECB deposit rate forecast. They see a subdued inflation picture in the region and a weaker business cycle in 2018. The end of the QE programme, expected this year, is likely to have a small effect on the bond market. 

Key Quotes: 

“Sentiment indicators, including PMI, Ifo and ZEW have pointed towards abating growth momentum in the Eurozone. Although we expect the euro area business cycle to move one gear lower, we still look for robust growth of 2.1% in 2018 and 1.9% in 2019.”

“We now expect the first ECB hike of 20bp only in December 2019, due to increased downside risks to the growth and inflation outlook. With core inflation disappointing again on the downside at 1.0% in March and economic momentum moderating, we do not expect ECB to shift towards a more optimistic language with regards to the inflation outlook anytime soon. This also means we expect the next change in the ECB’s forward guidance not to come before the July meeting.”

“We continue to see most of the expected rise in yields being in 2019."

“We continue to expect a steeper EUR yield curve on a 12M horizon. The ECB still maintains a relatively tight grip on the short end of the curve. However, this is not the case for the 10Y segment of the curve, which we expect to be pushed by higher US yields, the end of ECB QE from the ECB and pricing of rate hikes in 2020. An expected higher term premium works in the same direction. We have a 12-month 1.1% (earlier 1.2%) forecast for 10Y Germany. Higher 10Y yields is mainly a 2019 story.”