Market Mechanics: Northern Rates Head South
The surprise rate cut by Norges Bank and the Swiss National Bank’s return to a zero-policy rate triggered sharp moves at the front end of yield curves this week, as traders rapidly repriced easing expectations. In Norway, two-year yields dropped a not insignificant 10 basis points, while Swiss short rates compressed toward zero, flattening local curves. Currency markets added a layer of complexity – EUR/NOK spiked, and the Swiss franc strengthened post-cut – highlighting the interplay between rates, positioning, and safe-haven demand.
While Norway is unlikely to follow Switzerland all the way to zero, with a current policy rate of 4.25%, Sweden and Switzerland stand out as the nearest to the lower bound, with Switzerland already there and Sweden not far behind. The Riksbank reduced its policy rate to 2% this week, and further cuts are priced in. These dynamics are feeding into cross-currency basis, repo curves, and term spreads, reshaping relative value opportunities.
Meanwhile, the re-emergence of CHF-funded carry trades warrants caution. April’s sharp franc rally and lingering memories of the August 2024 JPY carry unwind, highlight how quickly crowded positions can unravel if volatility returns.
As policy rates drift lower, we believe demand for absolute return fixed income strategies is likely to rise—driven not only by the need for returns unanchored from traditional beta, but also by the protection such strategies may offer in an increasingly fragile geopolitical and cross-asset environment.
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