Buy SGB1059 in an ASW spread @ -48bp. P/L: -60bp/-39bp. 3M Carry+roll down = -0.1 + 0.4 = +0.3bp.
We have witnessed a rebound in the 10y ASW spread and are off the widest levels (-58bp) by some 10bp. We see this as a good opportunity to buy the bond versus swaps. An important driver for ASW spreads over the past couple of years has been the situation in the repo market relative to the 3M STIBOR fixing. Recent developments in the repo market, where government bonds are getting more squeezed, and only minor changes in the 3m STIBOR fixing do not justify the tightening of ASW spreads, see Chart 1 below.
The Riksbank now holds some 35% of all nominal bonds and 43% in the 10Y benchmark, SGB1059, Table 1. We see more signs of the bond market getting affected by the squeeze in the repo market. A rate at -0.80% is normally regarded as a floor for the repo rate over a longer period of time (market makers can get bonds at Riksbank’s repo rate -40bp from the Debt Office). However, short-term ‘overshooting’ is, of course, possible and these times are not normal. For instance, are market-making banks ready to boost their balance sheets without getting paid for it? Remember we are getting closer to the turn of the year.
To read the entire report Please click on the pdf File Below