No bond market bubble

- Recent market movements "Bond yields are trading roughly in line with the forecast we released a month ago. However, this hides a decline in the second half of August which has reversed in September. Changes in the market’s perception of double dip risks have been the key driver of yield movements. As such, the yield increase in recent weeks has been driven by slightly better indicators out of the US and Asia. Also, fluctuating demand from the European L&P industry has exacerbated yield movements. L&P companies were heavy buyers of bonds when yields declined but L&P bond purchases appear to have slowed a little as yields have moved higher. Illustrating this is the fact that yields in the 30Y segment saw the steepest fall when yields declined in August but have rebounded the most in recent weeks."
- Macroeconomic outlook "Economic indicators out of the US have surprised on the downside in recent months, although the past few weeks have seen a few positive surprises. Leading indicators are generally pointing towards a sharper slowdown, and in the past month we have downgraded our US growth forecast by almost one percentage point. We expect the US economy to grow 1½-2% in H2 10 and then to recover slowly to a 3% growth rate. Manufacturing ISM is expected to decline to the 50-51 region by the end of 2010. Payroll gains, which are generally very important for bond markets, are expected to average around 100,000 a month in the coming quarters, rising towards 200,000 by the end of 2011. All things considered, we do not expect a double dip in the US economy but the weakening of ISM data over the next 3-6 months should keep double dip fears alive. In the eurozone the news flow has been more positive in recent months, but we see increasing signs of growth losing momentum. German industrial orders and eurozone industrial production have remained flat for a couple of months, and the OECD leading indicator for the eurozone is still pointing downwards. We believe that GDP growth peaked in Q2 at about 4% q/q AR and we expect it to slow gradually to 2% q/q AR in 2011. Activity indicators such as the German IFO and eurozone PMI are set to decline in the coming quarters. We continue to expect very divided growth within the eurozone, with Germany outperforming while growth momentum remains subdued in southern Europe. Inflation is not giving much cause for concern. Core inflation in the US is running at a very low rate of 1%. In Euroland the inflation rate appears to have stabilised at roughly 1.5% in the eurozone and we expect it to remain there over the next 12 months."

DenDanske New Yield Forecast 20100915

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