Buy SGB1057 (Nov 2023) versus SGB1047 (Dec 2020) at 53.5. P/L 43bp/61bp. 1M carry/roll 0bp. A more cautious trade would be to do it versus a EUR 3s6s steepener.
The end of the year is getting closer and we see some good arguments for a short-term trade going into 2018, i.e. a December trade in SGBs.
Domestic bond investors need to adapt to a relatively big index duration extension of 0.18 years (OMRX ALL BOND) on Monday. This is the biggest duration extension in a December month since 2012. Given the poor liquidity in the last month of the year, it could very well have some impact.
Next week, on 12 December, inflation data is due for release . If our forecast is right, CPIF will be 0.2pp above the Riksbank projection. It is likely this is a consensus view but it could be interpreted as a little hawkish ahead of the December Riksbank meeting.
On 20 December, the Riksbank is due to announce its monetary policy decision. The QE programme is set to be in the spotlight . The Riksbank's current plan is to end it this month. The market also expects it to end and believes it will do only reinvestments going forward (also our base-case but it is a close call). Hence, an announcement of an extension would potentially have a big impact on the market, not least given that the Riksbank would also need to reinvest SEK50bn of the March 2019 bond. On the other hand, the market could interpret an end to QE as hawkish unless the Riksbank adjusts the repo rate path at the same time. We expect such an adjustment, i.e. postponing the first hike, to be a matter for the February or April meeting. In our view, it is possible that such a hawkish interpretation could lead to a flattening of the SGB curve.
In all, this flattener, either outright or relative to EUR swaps as a December trade, stands on its own legs but also offers some short-term protection to our other trade recommendations, where we are looking for the SEK swap to steepen relative to EUR swaps (we like to receive SEK 1Y1Y and pay 5Y5Y and do the opposite in EUR).
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