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Move Short Position From SGB1057 ASW To SGB1052 ASW In ASW Box‏

ByDanske Markets
Published 09/15/2013, 05:26 AM
Updated 05/14/2017, 06:45 AM
More potential in going short SGB1052 ASW

Since mid-June we have recommended buying SGB1049 ASW vs selling SGB1057 ASW. During the bear market, SGB1057 ASW tightened significantly. The spread is now wider in the short end leg of the box. SGB1057 ASW has clearly suffered from rising rates. As we now have a more careful stance on interest rates, we think the potential in SGB1057 ASW is shrinking. We thus close the recommendation with a 9.5bp profit.

Rather, we prefer going short in SGB1052 ASW. The mid segment of the ASW curve trades strikingly expensive relative to the 2Y and 10Y segment. Historically, the 5Y vs 2Y/10Y ASW barbell has tended to follow the general direction interest rates. Currently, however, the barbell is still hovering near lows.

Overall, repo rates in government bonds continue to be under pressure. Around 50% of outstanding SEK government bonds are still owned by foreign investors, who tend not to participate in the repo market. This decreases the amount of government bonds available to repo desks.

We still find short-end government ASW spreads appealing (particularly SGB1049) as the short end should continue to benefit from the lack of short-end government papers. Next week, we will have significant redemptions in September T-bills (around SEK41bn). Even though supply should increase as the seasonal pattern starts to pick up as we near the year end, demand for short-dated government bonds tends to increase as the bonds get shorter, and more suitable for money market funds.

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