Time for real rate bond auction again.
This time it is the bond SGBi3108, 2022-06-01, that will be tapped by SEK1bn. Since the last auction in early October, the real bond curve has flattened significantly, whereas the BEI rate curve has moved more in parallel, downwards (see table overleaf). Long-term BEI rates have declined quite substantially. The BEI rate SGBi3108 is now very close to the lows seen over the past year (chart on page 3). This should be a good opportunity to look into this BEI rate. We recommend buying the SGBi3108 in a BEI rate or in a BEI box versus German peer DBRi 2023.
Lately, Swedish linkers have been hit not only by lower-than-expected inflation at home but also by lower euro inflation. The last EUR HICP figure was clearly a shock to markets. However, the inflation rate has been trending downwards since early 2012. Even though we might see a minor rebound in November (there is some upside risk in the coming month from an Italian VAT hike), the inflation rate will remain under pressure from two factors: the low wage pressure and the apparent end of the commodity super-cycle. Core inflation is driven mainly by prices in the service sector, which in turn is highly dependent on conditions in the labour market. Most core countries’ inflation rates are moving below the 2% target and the inflation rate in peripheral countries is generally balancing around deflation. We have lowered our inflation forecast for 2014 to 0.8%.
Not surprisingly, short-end European break-even spreads have been under pressure and have underperformed Swedish break-evens. Since the turn of the year, a 2Y generic Swedish BEI spread has widened almost 110bp relative to a generic 2Y German BEI spread. However, further out on the curve, the relative movement has been less dramatic and 10Y Swedish BEI spreads still trade below their German equivalent. German forward BEI spreads still trade comfortably above 2% from 2020 and onwards, whereas Swedish forward BEI barely reach that level. However, with far less slack in the labour market, it could be argued that it could be easier for the Riksbank to reach the inflation target over time.
Follwoing the significant decline in HICP last week, we saw the BEI box move by 10bp but it has reversed again by some 4-5bp. We see this as a good opportunity to buy the SGBi3108 in a BEI box against DBRi 2023 (or in an outright BEI spread). The inflation outlook for the euro area is looking more and more subdued. Although this might have some impact on Swedish inflation (imported goods and services), the relative inflation outlook for Sweden versus euro area inflation in our forecasts point towards a clear shift. The currently lower inflation rate in Sweden will instead be higher than in Europe in early spring next year – see chart on page 3 showing Danske Bank’s forecasts on Swedish and euro area inflation.
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