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Strategy Sweden: Counteract A Rebound With A BEI Spread‏

ByDanske Markets
Published 02/06/2013, 03:02 AM
Updated 05/14/2017, 06:45 AM

Our mid-term view is steeper curves stemming from higher long-dated yields. The political uncertainty in Spain and Italy has, however, set the stage for a rebound in rates. Our case is that the term premium in the Swedish bond curve is still negative, a legacy from foreigners rushing into Swedish AAA-rated bonds up to last summer, and that it will slowly move towards a more neutral level. In order to protect our portfolio from a shortterm swing in risk appetite, we have decided to establish a BEI spread tightener from our outright sell in SGBi3108. Hence, we buy SGB1054 against SGBi3108 in a BEI spread at 165.5bp. If the peripheral stress continues for a longer time we will need to reconsider our mid-term view but that is still, we argue, too early.

This position, apart from protecting our portfolio for a rebound in rates, fits very well with our view that the recent rise in longer bond yields has pushed BEI rates too high. The market is pricing low inflation rates over the next couple of years but the current elevated BEI rates do imply very high forward BEI rates in longer maturities (see chart). Real rates have lagged the uptick in nominal rates and, hence, the risk/reward for going for a BEI tightener looks attractive for the moment, especially in a rebound in bond yields. Moreover, we expect a low CPI outcome in January that might dent BEI rates short term

We recommend transforming parts of a outright short positioning in longer real rates into BEI tighteners through going long matching nominal bonds. Buy SGB1054 and Sell SGBi3108 in a BEI tightener @ 165.5bp. Carry: +11bp up to 1 April.

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