SEK Views
yield by ~10bps and lowering the 10y yield by around 78bps.
Position for a flatter 5y/10y
SEK vs. EUR curve
SELL DEC16 RIBA FUTURE. As a tactical position in rates
ahead of the April meeting, we recommend selling the
Dec16 RIBA future at -0.51%. At its maturity at IMM
Dec16, the contract will fix at -0.50% if the repo rate
remains at its current level and will generate profits if the
repo rate is cut before the contract matures. While our
main scenario does not include another repo rate
reduction, the risk/reward involved in selling the Dec16
RIBA is very attractive as a rate cut may be made later
this year if the macroeconomic outlook deteriorates or
the ECB announces more stimulus measures. The
position also acts as a hedge ahead of the UK
referendum (Jun 23), where a No vote would create
increased uncertainty and financial market turbulence,
potentially triggering a dovish response from central
banks including the ECB and Riksbank.
Expecting the Riksbank to leave its policy
unchanged at its April meeting and with
additional easing measures looking
increasingly unlikely, markets are set to
refocus on future rate hikes this autumn.
With the 5y/10y SEK swap curve extremely
steep and the belly of the curve predicted
to underperform during H2, we recommend
positioning for a flatter curve, preferably
vs. the EUR curve. We also see value in
receiving 5y5y SEK vs. EUR IRS. We find
short dated Swedish inflation-linked bonds
very cheap vs. nominal bonds and
recommend BEI longs. Finally, as a
downside hedge we recommend selling
Dec16 RIBA futures at -0.51%.
MARKET TO REFOCUS ON RATE HIKES DURING THE
AUTMN – BELLY TO UNDER-PERFORM. As Swedish
short rates are lower than their EUR counterparts, and
because of the sharp widening of SEK vs. EUR spreads
further out on the curve, the 2y/10y SEK swap curve is
historically steep. Even more so, the 5y/10y curve is at
very extreme levels, not far from all-time highs of around
100bps.
APRIL 21 MEETING. We expect the Riksbank to maintain
the monetary policy unchanged (retaining a 3bps easing
bias while avoiding presenting new QE measures) on
April 21. Through its communication, we believe the
central bank will convince markets that it stands ready to
ease policy even further if deemed necessary, even
between ordinary monetary policy meetings. Such an
outcome would likely lift the 2y yield by 1-2bps. With
markets divided whether new QE measures will be
presented in April (around 40% for government bonds,
20% for IL bonds, close to 0% for covered bonds
according to our investor survey), the 10y yield will most
likely increase by approximately 2bps (relative to
Germany) if new QE measures are announced.
Most likely scenarios for April 21 (our subjective
probabilities)
Main scenario: • Unchanged rates, easing bias
remains, no changes to QE
65% probability
programme
Over the next 6-12 months, we expect the 5y/10y SEK
swap curve to flatten both outright and relative to the
EUR. This is because we believe the Riksbank will initiate
rate hikes well before the ECB, with markets likely to
refocus on upcoming increases already sometime during
H2 2016. As a result, SEK vs. EUR rate spreads will widen
especially in the 2-5y segment but less so in the 10y
segment, resulting in relative flattening of the SEK
5y/10y curve vs. EUR.
Dovish risk
• Unchanged rates, easing bias
scenario:
remains, SEK 50bn new QE
30% probability
Very dovish
• 10bps repo rate cut, easing
risk scenario:
bias remains, SEK 50bn new
QE
5% probability
Dovish risk scenario. There is also a relatively high
likelihood that the Riksbank will announce new bond
purchases on April 21. If it does, we expect the 2y yield to
decline 0-2bps and the 10y yield to decline slightly
(5bps).
Convexity of the 2y/5y/10y SEK IRS curve is near record
lows and is set to increase when the 5y rate starts to rise.
We expect this to occur when markets refocus on future
Riksbank rate hikes, helping flatten the 5y/10y curve.
From an historical perspective, current 5y/10y SEK swap
curve steepness is extremely high relative to the
convexity.
Very dovish risk scenario. A combination of a rate cut
(10bps) and a QE announcement would represent a
major dovish surprise for markets, depressing the 2y
21
SEK Views
RIKSBANK PURCHASES TO SUPPORT THE LONG END.
Also, the Riksbank may well make some additional
purchases of the longest bond SGB1053 (2039) as part of
its ongoing QE program. Otherwise, its QE portfolio will
likely fall more short relative to market duration
(currently 1.1y short). Such purchases would remove
substantial amount of interest rate risk from markets and
lend additional support to a flattening of the long end.
5y5y SEK vs. EUR IRS (bps)
1.8
1.5
2.5
30.7
15
23.0
19.8
19.5
17.1
5
4.5
0.0
1.5
0
1050
1051
2016
2015
BUY SHORT DATED INFLATION-LINKED BONDS. Short
dated Swedish ILBs remain very inexpensive vs. their
nominal counterparts. The following charts show our and
the Riksbank’s CPI forecasts.
32.5
25.2
10
2014
[SEK 5y-in-5y] - [EUR 5y-in-5y]
4.0
3.0
20
2013
6.5
25
2012
2008
1.5
1.5
2.5
30
2011
35
2010
Riksbank bond purchases (SEK bn)
40
2009
120
100
80
60
40
20
0
-20
-40
-60
-80
-100
-120
1052
1047
1054
1057
1058
1059
0.0
1056
1.5
1053
CPI (% y/y)
SEB exp. remaining purchases
Next purchase (announced)
4.0
Completed purchases
Tgt with f/c mid-2016 index weights
3.5
Forecast
Actual
Assumption
3.0
POSITION FOR A FLATTER 5Y/10Y SEK VS. EUR
CURVE. We recommend a 5y/10y flattener on the SEK
curve vs. a corresponding steepener on the EUR swap
curve. The box trades at historically extreme levels (chart
below). This position has a 12m carry of -7bps, which is
around 3bps less negative than a flattener on the SEK
curve alone. More importantly, the box is better hedged
against the adverse risk scenario of a steeper 5y/10y SEK
IRS curve, as we think it unlikely that a bear steepening
of the SEK curve would not be accompanied by a
steepening of the EUR curve.
2.5
2.0
1.5
Assumption
1.0
0.5
0.0
Riksbank
-0.5
SEB
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
-1.0
The next chart depicts fair value inflation expectations
(BEIs) based on our CPI forecast (green line), the
Riksbank’s estimate, and actual pricing (black line). We
see great value in buying SGB3110 (2019), which we
regard as trading at a real yield 40bps too high given the
current nominal curve.
Box: 5y vs. 10y swap curve in SEK vs. EUR (bps)
50
40
30
20
10
BEI (Fisher, %): Actual and fair value
0
-10
2.80
-20
2.60
2.38
2.28
2.40
-30
2.07
2.20
-40
1.881.85
2.00
-50
1.67 1.65
1.59
1.80
1.50
1.60 1.45
2016
2015
2014
2013
2012
2011
2010
2009
2008
-60
1.40
1.20
[5y] vs. [10y] in [SEK] vs. [EUR]
1.27
1.00
1.47
3108
3102
0.80
RECEIVE 5Y5Y SEK VS. EUR IRS. As an alternative to the
box, we suggest receiving 5y5y SEK vs. EUR IRS at record
highs of just below 100bps. The position has a 12 month
carry of -14bps.
1.37
0.83
0.60
3110
3107
0.40
1
2
3
4
5
6
1.55
1.56
1.66
1.79
1.77
1.55
1.72
1.53 1.77
3111
1.60
3104
3109
3112
Riksbank
SEB
Actual
7 8 9 10 11 12 13 14 15 16 17 18
Time to maturity (years)
Note: Fair value BEIs are based on our CPI forecast until end2017 and thereafter assuming an average annual CPI of 1.5%.
22