SEB is today introducing a new 5Y benchmark bond (SEB573) maturing on 17 June, 2020. The coupon rate is set at 1.5% and the ISIN code is SE0006258406. We would expect it to quickly reach benchmark size.
After the announcements from the Riksbank last week, there has not been much focus on covered bonds. However, pricing has been altered significantly, with covered bonds trading below 0.50% up to the 2019 segment. Covered bond spreads vs government bonds have widened significantly despite the low rate environment and hunt for yield. Once the dust settles, we would expect the hunt for yield to intensify again and investors to move further out the yield curve. We would expect longer dated covered bonds to benefit from the reallocation.
Pricing
We assume that all curves are correctly priced (based on prices as at 17 February, 09.45 CET) and that the new bond will reach benchmark status in due course.. Given these considerations, we think that a fair mid-pricing for SEB573 is 21-22bp above SEB572. The chart below shows the pricing (21bp above SEB572) relative to other bonds in true ASW terms. This pricing suggests to us that the new bond should trade slightly expensive relative to the other bonds with similar maturities. The bond pays a lower coupon compared to bonds with the same maturity date. Moreover, as the chart reveals, the market is not really taking coupon size into consideration, but instead is focusing more on matched maturity pricing – see chart on next page. In matched ASW terms, the pricing of SEB573, on the contrary, looks cheap. However, we believe the correct pricing is closer to fair value in true ASW terms. Hence, we suggest pricing should be 21-22bp above SEB572.
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