Jan von Gerich
Jan von Gerich is the Global Fixed Income Strategist for Nordea, and has been an expert on government bonds from before the global financial crisis. His analyses start from the big picture, as understanding the wider context is essential in current times, and then proceed to more market-oriented views.
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Jan graduated from the Helsinki University of Technology with a Master of Science and has been with Nordea since 2004, working in the Helsinki, Copenhagen and Stockholm offices. Previous to Nordea he has worked in New York within the financial industry.
Inflation is quickly becoming a topic again – not because of concerns the huge stimulus measures pursued by central banks would be creating inflation, but because the falling inflation rates are raising questions of whether central banks are doing enough. Bonds should thrive in an environment of falling inflation.
The recent sell-off in rates is likely to be reversed, which will increase the search for pick-up again. Such behavior would benefit Finnish bonds as well, making Tuesday’s Finnish bond auctions look more attractive.
The recent sell-off in interest rates is looking increasingly overblown, especially in Europe. We look for a notable move back lower in rates, with the Fed meeting next week being a potential trigger. Long positions especially in the short end of the EUR curve thus look quite attractive.
The recent considerable rise in rates looks to have taken place too fast, as concerns that the Fed would be close to scaling down stimulus measures have been driving markets. In Europe, not that much has changed and taking advantage of the higher carry available looks much more attractive again.
Equities have often rallied lately in response to negative economic data releases. Why is that and what does it mean for bonds? How should one be positioned ahead of major data releases like the payrolls report on Friday?
The Germans take pride in their Bundesbank and its history of guaranteeing price stability, a very sensitive topic in Germany. Lately, however, the monetary policy choices of the ECB have caused quite a lot of irritation among many Germans. Such irritation will only grow going forward.
After being characterized by a lack of potential and passion for years, the Japanese markets have definitely been reinvigorated by the actions taken by the new government and the central bank. However, is the more than doubling in government bond yields undermining the stimulus of the Bank of Japan?
Going for carry continues to be the name of the game, while the consideration of the credit risks involved seems once again to be a secondary concern. The risks of a bond bubble are no doubt in the air, but this trend has not run its course.
We now expect the ECB to keep rates unchanged at the current level until the beginning of 2015. Risks are clearly skewed towards another rate cut in the near term. Speculation in a deposit rate cut could take market rates to new lows in the near term and we have revised the market rates forecasts lower on all horizons. Lower EUR rates have implications for the EUR/USD forecast in the longer run, and we have decided to lower the end-2014.
It is a well-known fact that the outlook for individual Euro-zone countries is far from uniform. However, it is a misperception that all the northern countries would be doing better than the southern European ones.
Markets have once again started pricing in some risk of a rate cut and a majority of analysts now expect a refi rate cut from the ECB already at the meeting this week. We stick to our call and find it most likely that the ECB will keep rates on hold and instead come up with new measures to support bank lending to Small and Medium-sized Enterprises (SMEs).
If you torture the data long enough, it will confess. One can find hope in today’s Euro-zone credit numbers for March, though if you are pessimistic, the data offers a lot for you as well.
The concept of negative nominal interest rates has usually been considered something possible only as a short-term market aberration. Not anymore. Could negative interest rates really save us?
Big market moves have caught a lot of attention in the past few days. Where is the world going?
We have made a number of adjustments to our financial forecasts including US rates, EUR/USD, GBP, CHF, JPY and base metals. The big story is unchanged!
State Treasury Finland is launching a new 10-year benchmark, RFGB April 2023, at flat area vs mid-swaps, attractive pricing. We see value in maturity extensions from 5-7-year Finnish, German, Dutch, Austrian and French bonds into the new benchmark.
Risk appetite in general has been surprisingly resilient to adverse events in the past few months.
The EU appears to have fast-tracked its plans for bank resolution in earnest, at least based on the comments from the Eurogroup President Dijsselbloem. Such plans are another blow for the funding outlook of banks, and risk escalating the euro crisis again.
A deal on Cyprus was finally reached this morning. Unlike the earlier agreement that basically sent the message that all depositors in troubled banks should immediately withdraw their money, the terms of this agreement actually send a more constructive message. Still, days of wrangling and bad suggestions earlier have hurt the credibility of Euro-zone decision-makers further.
Väestön ikääntymisen Suomen taloudelle tuomien haasteiden pitäisi olla hyvin tiedossa, vaikka ennusteet pitkälle tulevaisuuteen ovatkin aina epävarmoja. Erityisen huolestuttavaa on se, että kun useimmissa muissa kehittyneissä talouksissa on otettu positiivisia askelia väestön ikääntymisen haasteiden voittamisessa, Suomessa on viime vuosina saatettu ottaa jopa takapakkia.
The recent report by the ratings agency Standard & Poor’s shows most countries studied have actually already made a lot of progress in addressing their increasing age-related spending compared to 2010, even though a lot of work remains. One of the most striking aspects of the report is the progress seen in Italy, which could see its rating rise notably going forward.
The Cypriot parliament yesterday rejected the proposed bailout including the controversial levy on bank deposits, putting the future path of Cyprus very much in question again. However, as the alternative for the bailout for the country looks much worse than the terms of the aid package, Cyprus will most likely have to accept the terms in the end.
Here are the usual financial forecast slides with our new financial forecasts published this this morning in Economic Outlook. We have changed our forecast for the Fed, the BoE, the SNB, Riksbanken, Euro rates, USD rates, EUR/USD, JPY, GBP, SEK, NOK, oil and the base metals.
A EUR 10bn bailout for Cyprus was agreed on Saturday. Today, the Cypriot parliament will have to pass the most controversial part of the bailout. In our view, the bailout does not change the overall picture for the Euro area here and now even if the final bailout terms include a haircut on deposits that was supposed to be insured. However, the current deal clearly increases the longer-term risks for the Euro area.
Despite today's weak auctions, the risk of an Italian auction actually failing looks remote. In fact, one should not give too much weight to the performance of individual auctions. Italian troubles will be reflected first on secondary markets, not on weak auction demand. The strong Irish 10-year bond launch carries a stronger message.
The ECB announced today 356 banks would return a total of EUR 61bn of the 3-year money they took from the central bank in the second 3-year LTRO early last year. The numbers illustrate that a considerably amount of excess liquidity will remain in the system for a long time, keeping overnight rates close to current levels. The banking system in general will heal only slowly.
Yesterday’s Fed minutes showed a central bank increasingly divided about the future of asset purchases, even though most participants found the purchases effective in easing financial conditions and helping stimulate economic activity. Still, the Fed clearly wants to be careful not to start removing accommodation too soon or too fast.
Risk sentiment has continued to mostly thrive lately. Improving economic data and continued easy monetary policy should still to provide support, but an increasing amount of event risk and uncertainty in the near future should lead to temporary profit taking and a correction lower in equity prices.
Regulators have been forced to backtrack on many of their most ambitious reforms lately, due to fears that big reforms could really hit the markets and the real economy very negatively. This trend now also continues regarding the planned margin requirements for derivatives, while more “fine tuning” of the planned reforms no doubt lies ahead before any actual implementation.
The other bigger one-time repayment of ECB 3-year loans will take place next week, when the second 3-year LTRO will have its first repayment date. The repayment interest is likely to come below the EUR 137bn seen in the first operation. That said, as we have seen a notable correction lower in short interest rates since the first repayments, risks are tilted towards higher rates and a steeper money market curve ahead of Friday’s data.
This is a regular monthly update of our financial forecasts. See the summary below or the full report via the link. Markets have settled a bit since our 29 Jan update (Markets getting too far ahead of economies). Still, we …
Political risk has been on the rise again in Spain and Italy lately, serving as the latest reminder that the risks inherent in these countries have by no means gone away. As the Spanish corruption scandal is far from resolved, while Italy is headed for uncertain parliamentary elections, market tremors will likely continue in the near future.
De finansielle markeder vil være præget af risikovillighed i den nærmeste fremtid. Men som følge af manglen på fundamentale forbedringer venter vi en korrektion i løbet af foråret.
Risk-on is likely to dominate in the very near-term but given the lack of fundamental improvements we expect to see a correction sometime during the spring.
State Treasury Finland will re-open RFGB 2.75% Jul 2028 on Tuesday, 29 January 2013. The credit quality of Finnish bonds remains solid, as has been illustrated by the recent actions taken by the rating agencies. With the 15-10-year curve looking quite steep, maturity extension offer good pick-up.
The ECB announced that 278 banks will repay a total of EUR 137bn of the 3-year loans taken from the central bank. The amount paid was higher than many had expected, and has put upward pressure on rates. However, one should not draw the conclusion that monetary policy was about to see an abrupt tightening and that rates would be heading higher for good.
Portugal followed in the footsteps of Spain’s hugely successful bond launch yesterday, making a comeback to bond markets for the first time since its bailout from other Euro-zone countries and the IMF. The Portuguese bond sale was just the latest reminder that confidence towards the Euro zone is returning.
Spain saw an unprecedented flood of orders for its new 10-year benchmark, the strongest sign yet that the market conditions have seen a material improvement. Only the yield of around 5.4% serves as a reminder that Spain is still facing some problems – quite significant ones for that matter. With this kind of demand, Spain is making good progress in meeting its huge financing needs for the year.
When the ECB announced its Outright Monetary Transactions (OMT) programme last autumn, Spain was expected to take advantage of the programme rather quickly. The activation of the OMTs would have required an aid programme for Spain, which the country was reluctant to apply for. Could Ireland become the first direct beneficiary of the programme?
Banks will have the first chance to repay the 3-year money borrowed from the ECB on 30 January. Early repayments are likely to give rise to pricing of higher short rates and cause some jitters of tightening policy. Despite the repayments, plenty of excess liquidity will remain, keeping short rates very close to current levels.
The rating agency Standard & Poor’s affirmed Finland’s AAA rating, and changed the outlook for the rating from negative to stable yesterday. After the move, Finland is the only Euro-zone country to have a triple-A rating from all the three major rating agencies with a stable outlook. The move also signals how S&P has seen the effect of the Euro-zone debt crisis fade
We have only made minor changes to the financial forecasts this time: We have lifted our mid-year target for the EUR/USD to 1.25, made minor changes to the GBP forecast, lowered our 3M EUR/SEK forecast to 8.60 and we have postponed the first hike from Norges Bank to March 2014 and only expect two hikes in 2014.
Spain sold a total of EUR 5.8bn of bonds today, which was more than the indicated EUR 4 to 5bn target range for the auctions. This represents just shy of 5% of the estimated total long-term borrowing requirement for the year. Today’s news was certainly positive for Spain, but one should not get too carried away. Spanish issuance needs going forward are daunting.
Greece is starting to see some light at the end of the tunnel, even though the country still has a long way to go. Economic confidence has seen a sharp rebound in the past few months, and is now at its highest level since the country received its first bailout in early 2010. Even the outlook for Greece is thus not all gloomy.
Berlusconi announced on Monday that his party, the People of Freedom (PdL), had formed an electoral pact with Lega Nord. This move increases the risk of a hung government and, in turn, a weak government, exactly what Italy does not need.
The Basel Committee on Banking Supervision announced yesterday it had agreed to considerably loosen its new liquidity requirements. The relaxation of the rules illustrates the regulators are not particularly willing to risk another big hit to the economy due to heavy regulation.