Final auction of the year

Transcription

1 Final auction of the year On December 9, Norges Bank will tap NOK 2bn in the NGB477 (1.75%, 03/2025). The NGB477 currently trades with a yield of 1.54%, implying a spread vs. DBR 2/25 of 99bps and an ASW spread of -26bps. The auction closes at CET and the result will be available on Reuter page NOCL/NOCN and Norges Bank s website at CET. We have seen increased demand recently and expect the auction to go well. MONDAY 7 December 2015 EDITOR Erica Blomgren The tripling of supply in 2012, coupled with the issuance of a new 10 year bond each year (instead of every second year which was the norm before 2014), has resulted in heavy supply pressure in the long-end. Especially since Norges Bank has favoured to build up size in the new 10y bond rather quickly; in 2014, the bank issued NOK 37bn in the new NGB476 while the volume in this year s NGB477 will amount to NOK 25bn (excl. the government s own holdings). We expect Norges Bank to be even more cautious in 2016, implying that the market should be able to better absorb the duration hitting the market next year. Consequently, some of the structural steepening pressure on the yield curve should ease. With this upcoming tap in NGB477 being the last auction until mid-/late January, NGBs with longer maturity should be supported. However, we prefer a long position in the segments as a relative bet vs. swaps or German peers. While we regard the Norwegian yield curve as too steep, the swap curve is too flat compared to the Euro zone and Sweden. We thus see value in buying NGB477 vs. swaps. Alternatively, we recommend to position for a flatter NGB ASW spread curve. We prefer the 2019/2025 spread as the NGB473 trades relatively rich on the ASW spread curve. The NGB473/NGB477 ASW spread currently trades at ~10bps. On a spread-basis, we prefer NGB477 vs. swaps. Position for a flatter NGB ASW spread curve. You can also find our research materials at our website: This report is produced by Skandinaviska Enskilda Banken AB (publ) for institutional investors only. Information and opinions contained within this document are given in good faith and are based on sources believed to be reliable, we do not represent that they are accurate or complete. No liability is accepted for any direct or consequential loss resulting from reliance on this document. Changes may be made to opinions or information contained herein without notice. 1

2 Relative value on the curve The ECB fell short of high market expectations last week. The subsequent selloff in German bonds has pushed Norwegian government yields higher and the curve has steepened. Market currently expects Norges Bank to cut the key rate 1-2 times before next summer. Our expectations of one final cut and still-dovish bias in the rate path is thus well reflected in pricing of the very short-end of the yield curve. Hence, we continue to favour the midto long-end of the curve. With this upcoming tap in NGB477 being the last auction until mid-/late January, NGBs with longer maturity should be supported. We prefer a long position in the segments as a relative bet vs. swaps and/or German peers. We recommend foreign investors to hedge their FX exposure as the NOK remains vulnerable to oil. 2

3 NGB ASW spreads Norwegian government bonds have cheapened substantially vs. swaps since this summer. Following a period of stabilization in November, bonds have again underperformed swaps over the past two weeks. Relatively on the ASW spread curve, the NGB473 trades rich while the long-end is extremely flat and trades ~1.0 standard deviation cheap compared to the average 90d spread. We regard the Norwegian swap curve as too flat, while easing supply pressure should support long-end NGBs in the short-term. Consequently, we expect the NGB ASW spread curve to flatten. Buying NGB477 vs. swaps offers positive carry at current levels. 3

4 NGB spreads vs. Germany Norwegian bonds have outperformed their German peers over the past month. Especially longer dated NGBs have outperformed, amplified by the selloff in German bunds following the ECB s rate announcement. The NGB curve has thus flattened relative to its German comparable, a trend we expect will continue. Despite the recent outperformance, spreads vs. Germany remain at historically elevated levels. We believe this partly is related to the supply picture and the poor performance of the NOK. As we expect the outlook for the both to improve next year, we expect the 6-10 years segments to continue outperforming their German equivalents. 4

5 Supply outlook Auction calendar Auction Auction Announcement Details date NGB Dec 9 Dec 7 NOK 3bn NGB477 Dec 18: Auction calendar and borrowing plan for 2016 incl. Q strategy interval: The 2016 budget proposal revealed a borrowing requirement of NOK 55bn next year, slightly higher than this year s NOK 46bn of gross supply. The report for Q should include the introduction of a new 10y bond during the quarter, implying that supply will be front-loaded (NOK 16bn in Q1 2015). 5