The tap auction in the June 2017 bond takes place this week (SGBi3107). We were a bit surprised that the Debt Office decided to tap this bond, as the volume in the new 10Y bond (June 2025) is still below SEK10bn. However, the SGBi3107 bond still trades with a fairly low BEI rate - 1.31%. This corresponds to 1.12% when adjusted for carry/seasonality.
The recent pick-up in the SGBi3107 BEI rate is to a very large extent related to the offsetting effect of the negative carry in March. Chart 1 illustrates how the BEI rate surged in March, but not so much if adjusted for carry. It is revealed from the chart that inflation expectations only moved some 22bp, not 35bp as the screens suggest. Hence, the bond still offers relatively cheap protection for higher inflation up to mid- 2017 and we think we will see relatively good demand for the bond at the auction.
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