The European Central Bank (ECB) is expected to adopt its first deposit rate hike in the first half of 2019, followed by a very gradual rate normalization of all policy rates. The background picture for the ECB is an ongoing recovery with underlying inflation well below target. The next reduction of the asset purchase programme is to be announced in the autumn and to come into effect in January 2018.

Further, the net asset purchases by the central bank is expected to end by summer 2018. While a policy rate hike before the quantitative easing ends is possible, it is not the baseline scenario.

Relief following the French elections and a big rebound in Euro-area core inflation have boosted a rebound in bond yields. After the French vote, the focus has shifted back to Euro-area inflation developments and the ECB.

Yields have move upside potential, as the ECB will gradually assume a more hawkish stance and a tapering of the bond purchases looms. Longer out, continued ECB presence in the bond markets for a long time coupled with subdued core inflation developments will still keep yields at low levels historically seen.

"We expect the ECB to change the forward guidance in the June meeting by dropping the no more reference to 'lower rates'", Nordea Markets commented in its latest research report.