EUR: New low in yields – Danske Bank

Arne Lohmann Rasmussen, Chief Analyst at Danske Bank, suggests that the Brexit is expected to give a downward pressure on growth and inflation in the Eurozone.

Key Quotes

“Inflation expectations in the market could drop further, though a move lower in EUR/USD would mitigate the impact.

10Y Germany to trade in the -10 to -20bp range on initial safe-haven buying. Wider asset swap spread with Bund saw in the 45-50bp range. The market could price in a slightly higher probability of a rate cut from the ECB, but we do not expect an imminent rate cut.

Further flattening of the yield curve 2Y10Y and 5y10. Investors will be pushed further out on the curve, whereas the short-end 0-5Y will have less downside as ECB will be very reluctant to cut further into negative and as the ECB does not buy bonds with yield below the deposit rate at -0.40%

A yield level significantly below zero in 10Y bunds is not seen as sustainable in our view. Hence, back to around zero in one to three months.”