Strategy: Sweden - Introducing KI1903‏

As of today (market conditions permitting) Kommuninvest will start to introduce a new loan (SE0005131299) matching SGB1052 and maturing on 12 March 2019. The fact that SGB1052 is the current 5Y super-benchmark should help investors switch into the new KI bond, which generally benefits liquidity. The coupon rate is set at 2.25%. Kommuninvest initially aims for a target of SEK3bn. Volumes could possibly increas if there is large demand. The volume offered is relatively small, and is in line with previously communicated issuance plans, which should ensure a smooth introduction. For 2013, Kommuninvest expects to issue a total of SEK25bn in the domestic benchmark programme (SEK5bn issued as of 20 March).

Longer Kommuninvest bonds have tightened significantly relative to government bonds in recent years. KI1708 trades at a tight level versus matching covered bonds (around 5bp below SHYP1579). Longer KI1708 yields a pick-up close to the one provided by covered bonds, while maintaining a zero risk weight. For some investors such as bank treasuries, this should be a very attractive feature.

Pricing
We assume that all curves are correctly priced, and that the new loan will reach benchmark volumes in due course. We are referring to market prices as of March 26 at closing 16:15 CET. Pricing is made slightly more difficult by the lack of liquid covered bonds beyond the early 2018 segment. Note that SGB1052 trades slightly cheap on the marginal rate curve. Given the current shape of the curves, we think a reasonable pricing is KI1903 84-86bp above SGB1052.

The graph below shows how the mortgage and KI bonds compare to the government curve. The level of 85bp above SGB1052 implies a zero coupon spread over the government curve of around 84bp.

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