Saxo Bank bond strategist says low rates likely here to stay


By Stelios Orphanides

As the European Central Bank (ECB) is unlikely to change its accommodating monetary policy in the foreseeable future, governments are likely to continue benefiting from low borrowing costs, a Saxo Bank official said.

The ECB, which in recent years resorted to negative rates and an expanded asset purchase programme in an attempt to help the euro area’s economy avoid deflation, has faced criticism mainly in Germany.

Despite a combination of external factors outweighing improvement conditions in the euro area the ECB “is no way near to revealing a near term exit,” said Simon Fasdal, who heads the fixed-income department of the Copenhagen-based financial firm in an interview.

“The pre-condition for ECB to taper is for inflation (and) growth to become self-sustaining. Right now, we are uncertain if we have the right global scope for this”.

Fasdal said that the ECB chairman Mario Draghi is assigned a complicated task as he has “on the one hand to explain that risk factors in the economy are now more balanced, which is positive (and) on the other hand, not balanced enough to start tapering or even the smallest unwinding of the present QE (quantitative easing) programme”.

The European Commission revised in May its 2017 growth forecast for the euro area upwards to 1.7 per cent – as much as it expanded in 2016 – from a 1.6 per cent in winter forecast and maintained its 1.8 per cent growth projection for 2018 unchanged.

Still, while headline inflation is expected to rise from 0.2 per cent last year to 1.6 per cent in 2017, the acceleration is expected to be short-lived as the effects of higher oil prices is likely to fade away next year, squeezing the inflation rate back to 1.3 per cent.

“The problem is that uncertainty from China, commodities and geopolitical tensions in the Middle East brings in potential downside risks,” Fasdal said. “In fact, with a bit more pessimism, one could argue that with the present price development in oil prices, we are not far from a return to a quite weak inflation outlook, which is the essential component for getting a tapering lift off”.

When the time comes – or rather if the time comes – for the ECB to start “tapering QE and goes onto a rate hike path, we will see higher yields, especially in government bonds,” Fasdal said. “Sovereign spreads in the Eurozone will also be impacted by this. We will see a widening of these”.
The damage caused by the euro crisis which erupted eight years ago forcing five euro area members to resort to bailouts left no permanent scars overall on the borrowing costs, even after Greece’s 2011 debt restructuring.

“No, I don’t think it is a big issue on credibility,” he continued. “In that context, I believe all countries benefit from the present climate of low inflation and yields, and quite strong macro. Overall, the euro area economy is in a much better state now, than a couple of years ago”.

Cyprus, one of the euro area countries engulfed in the crisis, with a government debt of 107.8 per cent compared to its economy’s output, will therefore continue benefiting from the low interest rate situation in the euro area, which “is a very good sign for the economy,” the Saxo Bank strategist said.

Fasdal added that while the euro area has still some distance to cover before reaching a fiscal union that would allow debt mutualisation, certain countries would likely benefit from even lower borrowing costs.

Recent electoral outcomes, such as the Brexit referendum and the election of Donald Trump last year “did not bring in a carnage in equities as expected” while on the other hand Emmanuel Macron’s recent victories “had little impact as it was already priced in,” Fasdal said. “The political events themselves are not the triggers, but economic development is. As long as there is uncertainty in the Chinese and US economies, yields have a hard time to break higher”.


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Stelios Orphanides is a journalist at To contact Stelios Orphanides: [email protected]