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Index-Linked Report: A Surge In Forward BEI Spreads

ByDanske Markets
Published 02/14/2013, 06:41 AM
Updated 05/14/2017, 06:45 AM
BIG
-0.43%

On Thursday, the real rate bond with 2017 maturity will be tapped for SEK750m. The most striking movement in the Swedish market since the last auction has been the surge in forward BEI spreads. The forward BEI rate SGBi3102/SGBi3108 trades close to 2.40%.

We still see upside risk in longer real rates outright. However, the recent spread widening in real rate spreads against, for instance, German linkers, which is close to the highs we saw early last year, at +44bp versus +38.5bp for the moment, might act as some anchor going forward. The parallel with the 10-year nominal bond spread is obvious.

The shortest BEI rate, SGBi3105, is trading at 117bp. Our inflation forecast up to maturity is at 150bp. With inflation probably bottoming in the spring and the Riksbank having delivered (or will in April) the last cut, conditions look favourable for buying the bond soon. The January CPI outcome, which is due to be released next week, is notoriously difficult to predict but after the data we see a buying opportunity. The carry season will also turn more favourable for the shorter bonds soon. The big unknown that could affect longer-term assessments of Swedish inflation is, of course, the krona, which has appreciated a lot at the start of this year.

Hence we stick to our view: forward BEI rates at highs, time to go for lower long-term BEI rates, or as an alternative, sell the real rates outright. Despite the recent surge in longer real rates (both outright and spread wise), we see plenty of room for higher real rates. We expect the real rate curve to continue steepening even though it is starting to look a bit stretched.

To Read the Entire Report Please Click on the pdf File Below.

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