Last week the major domestic bond indexes that consists of only SGBs were rebalanced and experienced the biggest duration extension in more than ten years. However, the more common combined indexes with both SGBs and covered bonds had a more normal extension. Nevertheless, the long-dated SGBs have outperformed both swaps and German Bunds at the start of 2018 (charts). We see the performance relative to swaps as an effect of the index rebalancing but the impressive performance relative to Germany has also been driven by the soft Riksbank and the lower-than-expected inflation print last month.
Now, as the rebalancing is over for this time (there could of course be some spill over effects in the next few days), we expect that the long-end SGBs could rebound a bit. At the same time, it is important to note that we foresee inflation continuing to surprise on the downside relative to Riksbank projections during the spring. Hence, we expect the Riksbank to postpone rate hikes at the April meeting and thus we are a bit reluctant to take position for a rebound in longer SGBs by selling vs. Bunds, although some short-term underperformance seems likely. Instead, we prefer to sell SGB1060 (12 May 2028) and buy the SGB1057 (13 Nov. 2023) in a forward ASW spread . In detail this means selling the SGB1060 and buying SGB1057 in a cash amount neutral spread and at the same time receive in a matching forward starting swap between the bond maturing dates. For instance, buying SEK100m of SGB1057 and selling SEK107m of SGB1060 together with paying SEK108m in the swap between 13 November 2023 to 12 May 2028 will give a net risk exposure in the trade of SEK45,000/bp in the forward ASW spread.
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