In this week's auction of SEK1bn, the June 2022 bond, SGBi3108, will be tapped. Since the last auction at the beginning of this month, short-end linkers have suffered somewhat after the lower-than-expected CPI reading. The real curve has flattened and short-end BEI rates have declined by roughly 10bp. As a result, current market pricing reflects an inflation expectation over the next few years which is close to earlier lows. As we have previously argued, while the Riksbank starts to put more focus on inflation, the market will gradually price in a scenario where inflation eventually moves closer to the target.
Currently, longer forward BEI rates peak just above 1.6% in the period 2023-28 - thus BEI spreads trade on the cheap side along the whole curve. Buying longer linkers in BEI spreads will most likely pay off as a strategic position. However, it might be a bumpy road as we expect low CPI readings in the coming months too. We think the auction offers a good opportunity to add to a strategic position being long linkers in BEIs. Hence, we recommend participating in the auction.
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