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Flatten 2S10S And Steepen The FRA Curve In A Box Trade‏

ByDanske Markets
Published 05/08/2013, 08:21 AM
Updated 05/14/2017, 06:45 AM
NWSA
-0.25%

Open position @ +48.5bp. Potential target @ +32bp, stop @ +58bp, Indicative carry: +2.6bp in 3M.

The 2s10s curve has steepened whereas the FRA curve has remained flat
The 2s10s curve (both government bonds and swaps) steepened by 15bp over the past month, and is now trading not far from range highs. At the same time, the FRA curve, SEP13/SEP15, has remained flat and has in fact flattened by 5bp, not far from range lows. The pivotal point in the trade is the 2y spot, but with the 2y bond SGB1049 close to its low this year (2bp above) we see a good opportunity to go for a rebound in the box 2s10s versus the FRA curve. The current pricing in the Riksbank is a cut of 20bp over the next three meetings.

We expect the Swedish FSA will soon publish the proposal for how the discount rate curve will be defined when introduced next year. We expect the 10y point to be the last liquid point along the swap-based Solvency II style curve to be supportive for the long end in Sweden, even though it is anticipated.

The trade can be done in swaps instead of government bonds, but as long-end government bonds have underperformed swaps lately we prefer the box, steepen the FRA curve against flatten the bond curve. Flatten the swap curve will of course mean more exposure to news on the S2 curve but it will probably lend support to bonds as well.

Ten-year bonds have underperformed European bond markets recently, which might persuade foreign end-investors to shift into Swedish long government debt again.

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