Sweden: Front End Of Curve Attractive‏

In recent days, fears that the possibility of paying back LTRO funds on a weekly basis starting from 30 January could lead to a tighter liquidity situation have pushed up EUR money market rates significantly. As our EUR strategists point out in Government Bonds Weekly (17 January 2013), there are several examples of past expiries of long-term cash operations that have pushed money market rates higher. Indeed, our colleagues think that if we see a large repayment in January (above EUR200bn), rates should increase from current levels. Consequently, Euribor futures have traded weakly and Shatz futures have taken a beating.

Let’s take a closer look at effects on the Swedish market. Higher Euribor fixings should to some extent also affect Stibor fixings. During autumn 2012 tighter fixing spreads in EUR helped bring down SEK fixing spreads as well. The opposite should be true as well, meaning that the widening of FRA versus Riba spreads should be expected given what we see in the EUR market, which is also priced in the market. However, what in our view is much more questionable is how short-end Swedish government bonds have traded. Whereas there is a close connection between Shatz futures and the Eonia fixing, Swedish government bonds have a much stronger link to the Riksbank’s repo rate which is unaffected by a decreasing liquidity surplus in EUR.

Moreover, expectations on the Riksbank are starting to look stretched as rate hike expectations are starting to appear as early as H2 13. We still think that the Riksbank’s next move is likely to be a rate cut as the export sector is still showing few signs of bottoming out and as the weakness could start to affect the domestic sector. The latest increase in Swedish short rates has not really been backed by stronger macro figures. With SGB1049 trading near the current repo rate, we think the recent move is overdone and we recommend buying SGB1049 outright. We still like steepeners on the Swedish bond curve. We currently price some 9bp of rate hikes in the autumn, too early we think. In addition, this, we think, will be supportive for our view on the ASW curve where we expect the 10-year spread to tighten but the two-year to remain wide. More precisely, the SGB1049 should perform in ASW spread.

To Read the Entire Report Please Click on the pdf File Below.