Index-Linked Report: Tap Auction SGBi3108‏

This week, the Debt Office will tap the 10Y SGBi3108, SEK1bn. BEI rates are down substantially over the last two weeks and offer, in our view, a very good opportunity to buy Swedish BEIs. The 10y BEI rate below 1.50% is a really good entry point for a long-term BEI rate, considering we are at the bottom of the inflation rate cycle. We suggest buying Swedish linkers at current levels across the board and the auction offers a good opportunity. We expect the auction to be well received.

We have stubbornly argued for a steeper real rate curve, with too little inflation expected over the next few years. Over the past week, this positioning has taken two severe hits. The first blow was after the Riksbank’s announcement last week. The second blow came on Tuesday this week when unemployment data was published. So, have we given up now? Not completely, as we think the market reaction following the Riksbank announcement is a bit puzzling. We still believe consumer confidence will continue to improve despite higher-than-expected unemployment. Consumer confidence is important, as historically it has been a good measure of where inflation is heading. Let us start with the Riksbank.

Riksbank changed its repo rate path in order, to reach the inflation target faster amid a mounting discussion in the media about its inability to reach the inflation rate target of 2%. The real repo rate path was also shifted downwards in order to move the inflation rate towards the target more quickly. Hence, the real repo rate will stay negative for longer. Still, the market is trading the SGBi3105 substantially higher than before the Riksbank announcement and much higher than the real rate path implies. ‘Low for longer’ – also for real rates according to the Riksbank.

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