In 2018, the usual turn effect disappeared earlier than in previous years.
Apart from expectations of a Riksbank rate hike, this appears driven by cheapening of USD liquidity in FX forwards.
The rate hike bias may also have contributed to wider fixing spread (on top of the direct effect of a rate hike).
However, from a longer-term perspective, the 3M (NYSE:MMM) Stibor fixing has on average been very close to the Riksbank repo rate (-0.49% in the 2016 to June 2018 period).
Liquidity situation in SEK has not fundamentally changed as the structural excess liquidity has continued to accumulate. Effects from FX forwards in USD and EUR are thus likely to be transitory.
A 3M fixing 12 bp above the Riksbank repo rate should decrease the appetite for weekly Riksbank certificates (offered at the Riksbank repo rate).
Market likely to respond to the maturity of SGB1052 by
buying fewer Riksbank certificates
The Riksbank QE programme is set to continue with reinvestments at least until June 2019, as previously communicated.
We would expect some more details about future plans at the April meeting 2019. In the meantime, SGB1052 will mature on 12 March 2019. As the Riksbank holds around SEK47bn in that loan, excess liquidity will decrease by around SEK49bn (including the coupon payment).
However, the market should respond by buying less weekly Riksbank certificates.
Our view on fixings is that there has historically been a threshold effect on excess liquidity: whenever excess liquidity exceeds SEK100bn, fixings should be low on average. In 2010-11, fixings did not increase until the last 1Y Riksbank repo expired and liquidity fell well under these levels.
We are currently significantly above these levels (above 10bp). Also, the spot level for fixing spreads tends to drive FRA-Riba spreads all along the money market curve.
Ted spreads likely to move tighter from elevated levels
Several factors point towards current fixings being excessively high:
‒ SEK excess liquidity to remain ample and close to record highs even after SGB1052 maturity.
‒ There are no redemptions in benchmark covered bonds in the coming months. Only the smaller
Kommuninvest loan K1903 will mature in the coming months (SEK19.3bn remaining), so there is no need for issuers to hoard liquidity.
‒ Rate hikes are unlikely in the coming months – first hike in the current path is after summer 2019 and risks are likely to be on the downside compared to that forecast.
‒ The year-end effect from cheapening USD liquidity is likely to fade as domestic liquidity conditions should prevail over time.
As the short-end Ted spread tends to reverberate all along the money market curve, we like going for tighter fixing spreads.
‒ We like receiving the matching FRA MAR19 versus RibaJun19 (weekly compounded Riksbank repo rate between Mar19 and Jun19 IMM) @ +11.5bp.
‒ We set the P/L levels to +2bp/+18bp.