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Swedish Rate Wrap

Swedish Rate Wrap — Did the Riksbank just extend the QE programme?

Ahead of the Riksbank's decision this week, expectations were relatively consistent: a largely unchanged interest rate path and a terminated QE programme. Early repurchase of maturing bonds was also expected. The moderate market reaction following the decision indicates that the outcome was close to expectations. However, in the last Swedish Rate Wrap for this year, we consider whether in reality, the QE programme has once again been extended.

Claes Måhlén, Chief Strategist | clma02@handelsbanken.se

Swedish Rate Wrap — Central bank show imminent

A cavalcade of central bank meetings will bring to an end a fairly undramatic year for monetary policy in global terms, with lower and lower volatility on the fixed income market. Nor is this round of meetings likely to shake the market to its foundations. We expect the Federal Reserve to hike the rate and to repeat its rate-hiking plans for the future. The ECB will not deviate from the soft message that we heard in October. The Bank of England will be waiting to see the results of the Brexit negotiations, while Norges Bank will make the most of its weak currency and strong oil in order to steepen the yield curve.

The Riksbank has the advantage of hearing the results of this week's meetings prior to the final monetary policy discussion of the year on December 19. The main focus will be on whether the QE programme will formally be terminated after year-end, with the Riksbank therefore being prepared to deviate from the ECB's plans next year. We believe this will be the case, but that the news will be couched in an otherwise dovish message.

Kiran Sakaria, Junior Strategist | kisa02@handelsbanken.se

Swedish Rate Wrap — Housing market is calling the tune

The fall in house prices during the autumn has caused concern on the market that Sweden may be poised for a trend similar to that seen in Denmark ten years ago. We make comparisons, and conclude that there are similarities, but that the differences are decisive, particularly the current absence of an interest rate upturn, and thus rising housing costs. In addition, the largest drop in prices in Denmark came in conjunction with the financial crisis. In the absence of a sharp upturn in mortgage rates or an external shock, a major fall in Swedish house prices would appear less likely. In addition, the continuing strength of data should reduce the concern about a broader slowdown in the Swedish economy.

For the Riksbank, the housing market trend may mean slightly more difficult terrain to manoeuvre in. We believe this supports the line of wait-and-see before making a change in monetary policy, despite the strong economy and an inflation rate close to the target.

Concern about house prices has also rubbed off on slightly higher spreads for Swedish covered bonds. With interest rates remaining low and tight spreads in the equivalent EUR-denominated instruments, we continue to see value in covered bonds.

Kiran Sakaria, Junior Strategist | kisa02@handelsbanken.se

Swedish Rate Wrap — Inflation once again under 2 percent

Nothing lasts forever! After a period when inflation exceeded the Riksbank's target, inflation will once again be under 2 percent in October. This development was expected, but is still a headache for the Riksbank. Having read the minutes of the October meeting, we stand by our view that bond purchases will not be extended after year-end. To reduce the risk of a strengthening krona, we think that the Riksbank will find other, more dovish actions, via the repo rate path and by commencing reinvestments for future maturities during 2018.

Covered bonds in SEK continue to struggle. This is especially so given the performance of equivalent bonds in EUR. We argue that the spreads will tighten in the future.

Swedish Rate Wrap — The elephant in the room forces the Riksbank to wait longer

Decisions during the week from both the Riksbank and the ECB provided plenty of food for thought. From the Riksbank's perspective, it is mainly the ECB that is a problem. The ECB's QE programme will continue until at least September 2018, and most likely longer. This increases the likelihood of the Riksbank extending its own QE into 2018. Our main scenario is that the Riksbank will decide to postpone its interest rate path and will signal a later increase than is currently being indicated. Our view is that the Riksbank will finally increase its key rate in September 2018. 

Swedish Rate Wrap — Global tailwind provides fuel for bond yields

The global economy is moving from recovery to economic boom. Despite risks of a setback, the risk scenario is now considered to be lower than at the beginning of the year. This provides fuel for rising inflation and thereby a normalisation of global monetary policy. In turn, it creates an environment for long yields to increase.