New research from Danske Bank Markets
Trade: Buy SGB1059 and sell SGB1047 in a bond curve flattener @ 94.5bp. P/L: 80bp/105bp. 3M carry: +0.5bp, 3M roll down: -1.7bp.
In our note Summertime performance in Swedish SGBs again? , 19 April 2017, we highlighted the upcoming bond-friendly environment during the summer when coupons and redemptions will be paid to investors. On top of this, the largest bond index duration extension this year is set to take place (9 June). This seasonality has, over the past two years, had a big impact on SGBs. The yield curve has flattened and SGBs have outperformed both Bunds and swaps. Our clear perception is that flows and index rebalancing (as simple and as trivial as it might seem) have a bigger impact on the market today, amid Riksbank QE purchases and the low yield level, compared to a few years ago. The positive cash flow to investors combined with the index extension are set to boost demand for especially longer SGBs. The reason is that only longer-dated SGBs (5Y+) have enough required duration to fill the gap to the bond index duration. Moreover, domestic real money investors that track the indices are underweighted SGBs and the share of SGBs in the index is set to increase at the June rebalancing (9 June). We believe the time is ripe to take position for a pickup in demand for longer SGBs.
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