Government Bonds Weekly, 17-24 March 2017
- Still value in Portugal and too early to position for a Bund sell-off
Arne Lohmann Rasmussen
Chief Analyst, Fixed Income Research
[email protected]
+45 45 12 85 32
Jens Peter Sørensen
Chief Analyst, Fixed Income Research
[email protected]
+45 45 12 85 17
17 March 2017
Investment Research
www.danskebank.com/CI
Important disclosures and certifications are contained from page 15 of this report
Market view: Dutch election outcome removes some political risks
We close our long France 5Y CDS and keep Bund widener
• The Dutch election was the first of many political
events in Europe in 2017. The polls turned out to be
correct and Geert Wilders did not get the support
that the market had initially feared. A new coalition
under the leadership of PM Mark Rutte is now the
most obvious outcome, although it will be difficult to
form a coalition given the many small parties in the
new Dutch parliament.
• We have seen some positive ‘spill over’ to the French
presidential election as the CDS on France has
declined. Hence, we are closing one of our ‘Frexit’
hedges - being long 5Y CDS on France.
• The French polls continue to show a stable lead to
Source: Danske Bank Markets
Emmanuel Macron over Marine Le pen in a possible
Macron well ahead of Le Pen, according to the polls
second round. See for example,
http://dataviz.ifop.com:8080/IFOP_ROLLING/IFOP_1
6-03-2017.pdf
• We keep our long Bund spread ahead of the March
quarter-turn even though the spread has tightened
recently. However, as we are approaching the Q1,
then the turn-effect is likely to put pressure on the
Bund spread as seen in 2016. We expect this
pattern to prevail over the next two weeks.
Source: http://dataviz.ifop.com:8080/IFOP_ROLLING/IFOP_16-03-2017.pdf
2
Market views: too early to position for a Bund sell-off
France and Italy continue to underperform the ‘north’
• The main market theme is whether the ECB will
choose to hike rates before the QE programme
has come to an end.
• The argument is that the negative rates are
weighing on banks’ earnings/depositors. On the
other hand, an extension of QE purchases would
ensure that yields in periphery bond markets
remain low.
• We think it is too early to discuss ECB rate
hikes/end of QE and that we are not in for a big
Bund sell-off. The risk is that the ECB moves too
quickly as in 2011, when it hiked rates twice,
which had to be reversed the same year.
Furthermore, we share the view of our
economists, who argue that inflation will be
nowhere near 2% in one year’s time. We see no
imminent solution to the repo squeeze in Bunds.
• We are still long the 6Y NGB. It has performed
well after the low inflation number and the
relatively dovish Norges Bank, but the open
currency exposure has been expensive.
• We keep our long 10Y PGB as Portugal has done
a lot of catching up to peers in Euroland and is
now one of the top performers in 2017. However,
there is more to come, as shown in the following
slides.
2017 ytd Risk-adjusted return on EFFAS 1-10Y bond indices
Norway
0.4%
Portugal
0.0%
Denmark
-0.4%
Germany
-0.6%
Austria
-0.7%
Netherlands
-0.7%
Finland
-0.9%
Spain
-1.0%
Belgium
-1.1%
Sweden
-1.3%
Ireland
-1.4%
France
-1.7%
-2.0%
Italy
-2.5%
•
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
Note. We calculate the risk-adjusted return as there are small differences in the duration of the
EFFAS 1-10Y for the individual countries; we scale all countries to the duration of Germany, so
countries with a higher duration than Germany will have the absolute return ‘scaled down’ and vice
versa; this should give a more accurate picture of the ‘league table’. Source: EFFAS, Danske Bank
Markets
We remain long 6Y NGB vs Germany but with an open FX exposure
NGB 2'23 - DBR 1.5'23
180
170
160
150
140
130
120
110
100
90
80
Feb-16
Apr-16
Jun-16
Source: Danske Bank Markets
Aug-16
Oct-16
Dec-16
Feb-17
3
Portugal is outperforming peers (Italy and Spain) – but there is
still of room for more performance in the 5Y to 10Y segment
yield spreads for PGBs versus peers, bp
Yield curve for Portugal vs. peers
6.00
280
260
5.00
PGB 07/26 vs BTPS 06/26
PGB 07/26 vs. SPGB 07/26
240
4.00
220
3.00
200
180
2.00
160
1.00
0.00
Portugal (Ba1)
Slovenia (Baa3)
Spain (Baa2)
Croatia ( Ba2)
Ireland (A3)
Italy (Baa2u)
140
120
-1.00
0
5
10
Source: Danske Markets
15
20
25
30
35
100
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Source: Danske Markets
We have seen a tightening of the yield spread between Portugal and its peers such as Italy and Spain.
However, looking at the wide spread in the 5Y and out along 10Y segment, there is room for more performance.
The pricing of the new 10Y Croatian government bond was substantially lower than the pricing of the
10Y PGB, despite being rated lower than Portugal. CROATI 3% 03/27 was priced at 230bp to mid-swaps,
while PGB 4.125% 04/27 is priced at 330bp.
On the following page, we compare some of the fundamentals of Portugal with Italy, Spain and Croatia.
As can be seen from the data, Portugal is well positioned for an upgrade as well as further spread
tightening.
4
Portugal is still paying for ‘past sins’ looking at the yield spread to
peers. However, looking at fundamentals (GDP growth,
unemployment, budget deficits, current account), it is too cheap
Portugal (Ba1)
Italy (Baa2)
Spain (Baa2)
Croatia (Ba2)
10Y yield
4.26%
2.53%
1.88%
3.06%
GDP forecast, %
2017
1.6
0.9
2.3
3.1
2018
1.5
1.5
2.1
2.5
Unemployment, %
2017
10.1
11.6
17.7
10.8
2018
9.4
9.4
16.0
9.3
Budget deficit, % of GDP
2017
-2.0
-2.4
-3.5
-2.1
2018
-2.2
-2.2
-2.9
-1.8
Current account (% of GDP)
2017
0.4
2.1
1.7
7.0
2018
0.6
0.6
1.6
7.0
Source: EU commission forecast
• Portugal is still trading at a significant discount to peers such as Italy, Spain and Croatia
despite the fact that important fundamentals such as GDP growth, unemployment, the
budget deficit and the current account have come into line with these countries as shown
above.
• However, Portuguese government debt is still substantial – 128% of GDP in 2017 versus
99% in Spain and 83% in Croatia but a staggering 133% of GDP in Italy.
• Looking at the rating comments, the high Portuguese government debt is still an obstacle to
an upgrade but the outlook is likely to be changed from stable to positive.
• If the Portuguese government can keep the economy on track, an upgrade could come in late
2017 or early 2018.
• However, the wide spread to both Croatia and Italy seems too high given the fundamentals.
Thus, we still see much more value in Portugal than in Italy.
5
Supply and rating calendar for next week
week 12
Monday
20/03
Wednesday
22/03
issuer
Belgium
Belgium
Belgium
Germany
Portugal
Denmark
Sweden
Sweden
type
BGB
BGB
BGB
Bund
PGB
DGB
SGB
SGB
maturity
Jun-2027
Jun-2038
Mar-2041
Feb-2027
coupon
0.8%
1.9%
4.3%
0.3%
size
EUR3.5bn
2Y and 10Y
Jun-2032
Jun-2022
2.3%
3.5%
SEK0.5bn
SEK2bn
EUR 3bn
Source: Danske Bank Markets
• Supply. The week kicks off with Belgium tapping in the 10Y benchmark (BGB Jun’27) and in the BGB Jun’38 and
the BGB Mar ‘41. It will be the first regular tap by the Belgium Debt Office this year after the big syndications in
January and February where EUR12bn were raised in the market. The Belgian debt office has so far issued 34%
of the EUR35bn target.
• Germany will tap EUR 3bn in the 10Y benchmark Bund. The amount is in the lower end and given the tight repo
we would look for healthy demand. This was also the case with the previous tap of this bond.
• Finally, Portugal might be in the market.
• In Scandinavia, both Denmark and Sweden will be in the market. The Danish DMO is expected to tap in the usual
2Y and 10U benchmark bonds. Demand for the 2Y and 4Y bonds have been on the weak side over the past
couple of auctions, whereas the 10Y has seen better demand. Sweden will be tapping in the 5Y and 15Y bonds.
• Ratings. No rating announcements next week.
6
Net cash flow – slightly negative as no redemptions
Net cash flow
Germany
France
Italy
Spain
Portugal
Belgium
Netherlands
Austria
Finland
Ireland
Slovakia
Greece
EFSF
ESM
Total - EUR
Week 12
-3.0
0.0
0.0
0.0
-1.0
-3.5
0.0
0.0
0.0
0.5
0.0
0.1
0.0
0.0
-6.9
Week 13
-4.0
0.0
-12.0
0.0
0.0
13.7
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
-2.2
Week 14
13.1
-9.5
0.0
-4.0
0.0
0.0
0.0
-1.0
0.0
0.0
1.1
0.0
0.1
0.0
-0.1
Denmark
-2.5
0.0
-2.5
Sweden
-2.5
0.8
-2.5
Norway
0.0
-3.0
0.0
Note: All volumes are in billions, local currency.
Note: Negative means more issuance than coupon and redemption
Week 15
-2.9
0.0
-8.0
0.0
0.0
0.0
-2.0
0.0
0.0
-1.0
0.0
0.0
0.0
0.0
-13.9
Week 16
-0.5
-9.5
0.3
-4.0
1.0
0.0
11.5
0.3
5.8
0.5
0.0
1.6
0.1
0.0
7.1
0.0
0.0
0.0
0.0
0.0
0.0
Source: Danske Bank Markets
7
Last week’s auctions/syndications
week 10
Tuesday
07/03
Wednesday
08/03
Thursday
09/03
issuer
Austria
Austria
Germany
Italy
Denmark
Denmark
Germany
Portugal
Portugal
Sweden
Sweden
Ireland
Ireland
type
RAGB
RAGB
DBRi
BTPei
DGB
DGB
Bobl
PGB
PGB
SGB
SGB
IRISH
IRISH
maturity
May-2034
Oct-2026
Apr-2030
May-2028
Nov-2021
Nov-2027
Apr-2022
Jun-2020
Jul-2026
May-2025
Nov-2026
May-2026
Feb-2045
coupon
2.4%
0.8%
0.5%
1.3%
3.0%
0.5%
0.0%
4.8%
2.9%
2.5%
1.0%
1.0%
2.0%
sold
600
600
408
3,000
200
2,260
3,155
500
612
1,500
1,000
850
400
b-t-c
2.5
2.3
1.5
2.1
1.0
1.4
1.1
2.7
1.8
3.7
2.4
1.7
2.0
avg. Yield
1.08%
0.50%
-0.74%
-0.29%
0.62%
-0.45%
1.13%
3.95%
0.44%
0.7%
1.0%
2.2%
Source: Bloomberg, Danske Bank Markets
8
Supply YTD and remaining net supply
Expected gross bond issuance 2017
Expected issuance
(Bn)
Official estimate*
Danske Markets
Germany
France
Italy
Spain
Portugal
Greece
Belgium
Netherlands
Austria
Finland
Ireland
EU
EFSF
ESM
Total - EUR
152.0
210.0
260.0
120.0
15.0
0.0
35.0
32.5
21.0
16.0
11.0
2.0
40.0
17.0
931.5
152.0
210.0
260.0
120.0
15.0
0.0
35.0
33.0
21.0
16.0
10.0
2.0
40.0
17.0
931.0
Gross
issuance
2017 YtD
34.0
52.4
56.1
42.6
5.6
0.0
12.0
11.4
3.9
4.5
6.7
0.0
9.5
3.5
242.3
Bonds
maturing
2017
92.0
96.6
167.3
65.3
6.1
7.4
25.2
34.8
8.0
11.0
6.2
1.2
25.9
6.2
553.1
Net issuance
2017 YtD
-16.0
33.4
12.4
21.2
5.6
0.0
12.0
0.6
-6.0
4.5
6.7
0.0
9.5
0.3
84.2
Expected net
issuance
2017
60.0
113.4
92.7
54.7
8.9
-7.4
9.8
-2.3
13.0
5.0
4.8
0.9
14.1
10.8
378.4
Denmark*
65.0
65.0
14.5
52.8
14.5
12.2
Sweden
65.0
65.0
27.0
79.7
27.0
-14.7
Norway
50.0
50.0
23.0
44.4
23.0
5.6
*Denmark numbers are notional levels – i.e. not taking into account the additional revenue from sale of bonds trading above 100.
% issued YtD of expected gross
Official
Danske Markets
estimate
22%
22%
25%
25%
22%
22%
36%
36%
37%
37%
0%
0%
34%
34%
35%
35%
19%
19%
28%
28%
61%
67%
0%
0%
24%
24%
21%
21%
26%
26%
22%
41%
46%
22%
41%
46%
Source: EU debt agencies, Danske Bank Markets
9
Trades
Open strategies
Type
Trade
Idea
Risk
Buy IRISH 1.7% May 2037
Long 20Y Ireland asset
asset swapped @ 57bp,
swapped
opened Jan 5, 2017
The issue premium after the 20Y
syndication is attractive
Buy NGB 2.0% May 2023
Long 6Y NGB vs Bunds.
versus DBR 1.50% May
Keep an open FX
2023 @ 159bp and
position (FI Top Trade
EUR/NOK @ 9.04. Target
2017)
130bp.
Norwegian inflation to trend lower in
2017 and high Nibor fixings to stabilize
and edge lower. Attractive spread vs
Germany. Higher oil prices indicate
constructive outlook for the Norwegian
krone.
The volatile NOK and the
support to Bunds from ECB QE
The forward rate 3Y5Y is very high in
Portugal. Above 5.2%. The recent
steepeing 3Y8Y relative to other
periphery looks excessive.
Further sell-off in
PGB's/periphery and the
support to the short-end from
QE purchases.
Position for a lower
PGB forward rate
3Y5Y
Buy PGB 10/25.
@3.71% versus PGB
06/20 @1.39% for a
spread of 232bp. We
recommend to do this
BPVneutral.
Futher long-end supply and
less QE
Target & P/L
Target & P/L
Target
35bp
Currently
58bp
Opened
54bp
P&L (bp)
-4bp
Target
130bp
Currently
Opened
146bp
159bp
P&L (bp)
13bp
P&L FX (%)
-0.7%
Target
200bp
Currently
255bp
Opened
232bp
P&L (bp)
-23bp
Target
Buy FRTR 0.25% 11/26
Long 10Y France asset
versus swaps @ 6bp or
swapped or vs
Nether 0.5% 07/26
Netherlands
@33bp
France had underperformed significantly
on the back of the unvertainty surrounding
the French presidential election and due
to the sell-off, where France is being used
to offload risk
Position for flatter
curve between DGB
'25 and DGB '27
The DGB '27 came with a small discount at Further steepening of core
the auction and the forward rate is
curves and forthcoming DGB
attractive.
'27 supply
Long 10Y Portugal
outright
Position for Danish
outperformance in 2Y
segment
Frexit hedge trades
(Long 5y CDS on
France and long Bund
asset swap)
Buy DGB 1.75% Nov '27 vs
DGB 0.5% Nov '25 @ 30bp
(bought at auction January
25) for a spread of 22bp.
Buy PGB 4.125 Apr '27 @
4.42%
Buy DGB 0.25% Nov '27 vs
BKO 0.0% Dec '18 @ 19bp
Buy 5Y France CDS @ 56bp
and Bund asset swap @
51bp. The trade has been
rolled over in March with
1bp carry.
Source: Danske Bank Markets
Further sell-off in fixed income
as well as the political
uncertainty
Portugal has underperformed strongly the Further sell-off in periphery,
last month despite decent economic
QE tapering and DBRS
numbers.
downgrade of Portugal.
DGB's can outperform if the fear of Frexit
intensifies and trigger inflow in Denmark.
Will also benefit if the support to Schatx
wanes as DGB '18 very stable in yield.
We officially now add these two trades to
our portfolio after it over the last week has
become slightly cheaper to hedge an
escaltion of the political uncertinty in
Europe ahead of the France Presidential
election. We see the trades as a hedge of
our portfolio.
Strong support to Schatz from
e.g. QE purchases and turneffects (repo, collateral etc.)
Currently (swap/Nether)
27bp/57bp
Opened (swap/Nether)
6bp/33bp
P&L (bp) (swap/Nether)
-21bp/-24bp
Target
22bp
Currently
30bp
Opened
30bp
P&L (bp)
0bp
Target
4.00%
Currently
4.26%
Opened
4.42%
P&L (bp)
16bp
Target
10bp
Currently
23bp
Opened
19bp
P&L (bp)
-4bp
Target
Le Pen loosing out in polls and
less QE demand for bunds as
we appraoch Q2, where PSPP
purchases will drop.
Currently
56.5bp/45.431bp
Opened
56bp/48bp
P&L (bp)
1bp/-2bp
10
Closed trades
Closed strategies
Type
Trade
Idea
Long 2Y DGB vs RAGB
Buy DGB 0.25% Nov '18 vs Short-end of DGB curve supported by low
2018 (FI Top Trade
RAGB 1.15% Oct '18
and stable Cita fixings and less support to
2017). Profit reached
@10bp. Opened Jan 3, 2017 2Y RAGB than Schatz
Jan 20, 2017
Long Bund Spread
Tight repo situation (squezze) to continue
Buy Bund spread @ 38.5bp,
and ECB QE buying to support Bunds. Low
opened Dec 9, 2017
German supply in 2017.
Risk
Weaker DKK and strong
support to semi-core from
ECB QE. ECB buying below
depo.
Risk on and/or normalisation
of the repo squezze
Target & P/L
Target & P/L
Target
3bp
Currently
2.0
Opened
10.0
P&L (bp)
8.0
Target
50bp
Closed at
50bp
Opened
38.5bp
P&L (bp)
11.5bp
Source: Danske Bank Markets
11
Fixed Income Top Trades 2017
Note: *The estimated P/L includes roll-down, ** Based on Danske Bank Mortgage Index relative to EFFAS 3-5y DKK government bond index,
*** This is reported as bp of the notional on the long leg of the trade, i.e. the bought 5Y30Y Payer, and is therefore NOT bpv- or delta-adjusted.
Source: Danske Bank Markets
12
Current rating and outlook
Fitch
Moody's
S&P
DBRS
Germany
STABLE
STABLE
STABLE
STABLE
AAH
Finland
STABLE
STABLE
STABLE
STABLE
STABLE
STABLE
STABLE
STABLE
Fitch
Moody's
S&P
DBRS
Germany
AAA
Aaa
AAAu
AAA
Finland
AA+
Aa1
AA+
Netherlands
AAA
Aaa
AAAu
AAA
Netherlands
Austria
AA+
Aa1
AA+
AAA
Austria
STABLE
STABLE
STABLE
STABLE
Belgium
AA-
Aa3
AAu
AAH
Belgium
STABLE
STABLE
STABLE
STABLE
France
AA
Aa2
AAu
AAA
France
STABLE
STABLE
STABLE
STABLE
Ireland
A
A3
A+
AH
Ireland
STABLE
POS
STABLE
STABLE
Italy
BBB+
Baa2
BBB-u
BBBH
NEG
NEG
STABLE
STABLE
Spain
BBB+
Baa2
BBB+
AL
Spain
STABLE
STABLE
STABLE
STABLE
BB+
Ba1
BB+u
BBBL
Portugal
STABLE
STABLE
STABLE
STABLE
AA
Aa1
AAu
AAA
UK
NEG
NEG
NEG
STABLE
Denmark
AAA
Aaa
AAA
AAA
Denmark
STABLE
STABLE
STABLE
STABLE
Sweden
AAA
Aaa
AAAu
AAA
Sweden
STABLE
STABLE
STABLE
STABLE
Norway
AAA
Aaa
AAA
AAA
Norway
STABLE
STABLE
STABLE
STABLE
Slovenia
A-
Baa3
A
---
Slovenia
STABLE
POS
POS
---
Cyprus
BB-
B1
BB
B
Cyprus
POS
POS
POS
POS
Greece
CCC
Caa3
B-
CCCH
Greece
---
STABLE
STABLE
STABLE
EFSF
AA
Aa1
AA
WR
EFSF
STABLE
STABLE
STABLE
STABLE
ESM
AAA
Aa1
---
---
ESM
STABLE
STABLE
---
STABLE
EU
AAA
Aaa
---
---
EU
STABLE
STABLE
STABLE
STABLE
Portugal
UK
Italy
Source: Moody’s, Fitch, S&P and DBRS
13
Rating calendar for 2017
Moody's
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
S&P
Germany
24
23
20
Germany
France
10
23
13
France
Italy
10
9
6
17
Spain
Portugal
30
13
23
3
Belgium
Finland
27
Ireland
20
23
2
12
Greece
23
3
Finland
Ireland
Denmark
Sweden
Norway
1
27
17
27
15
4
31
3
1
20
DBRS
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Germany
27
21
31
29
13
14
Spain
7
6
Portugal
21
20
Not scheduled
Belgium
24
Netherlands
17
18
11
21
29
6
3
Ireland
Denmark
21
10
15
21
Finland
11
7
1
17
Austria
28
13
15
Greece
18
17
15
2
Sweden
Italy
15
28
Austria
19
France
21
Netherlands
14
Norway
16
Belgium
13
Denmark
20
24
Belgium
17
28
3
15
21
Ireland
1
27
Portugal
29
20
Finland
1
21
27
Greece
27
4
3
Italy
17
17
17
10
France
31
Portugal
Austria
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Germany
Spain
Netherlands
Not scheduled
Norway
6
5
20
21
7
Sweden
27
7
27
15
24
Denmark
Spain
3
7
24
Austria
13
30
31
Netherlands
Fitch
1
24
Greece
28
Italy
20
5
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
25
24
18
13
14
Sweden
19
10
Norway
5
3
Source: Moody’s, Fitch, S&P, DBRS
14
Disclosures
This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of the research report are Jens Peter
Sørensen, Chief Analyst and Arne Lohmann Rasmussen, Chief Analyst.
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