Government Bonds Weekly: Focus on possible new Irish green bond and Portugal to become a full Investment Grade Sovereign

Transcription

1 Investment Research Government Bonds Weekly: Focus on possible new Irish green bond and Portugal to become a full Investment Grade Sovereign Arne Lohmann Rasmussen Jens Peter Sørensen Philip Toft Lyngsø Chief Analyst, Head of FI Research Chief Analyst, FI Research Assistant Analyst, FI Research arr@danskebank.dk jenssr@danskebank.dk phl@danskebank.dk Aila Mihr Analyst amih@danskebank.dk 5 October Piet P. H. Christiansen Senior Analyst phai@danskebank.dk See our new research homepage: Important disclosures and certifications are contained from page 21 of this report 1

2 Supply and ratings We expect Portugal to get the last IG rating from Moody s. Irish green bond imminent Supply and flow negative net cash flow The positive cash flow in October is of course an open invitation for issuers looking to tap the markets. Ireland could very well be out as early as next week with the new green bond. For more see slide 4. The Netherlands will be in the market on Tuesday with a tap in the 2.75% Jan- 47 bond. The DSTA plans to tap up to EUR1bn in the bond. Otherwise we have the German Finanzagentur in the market with a EUR3bn tap in the 10Y Bund (Wednesday) and a EUR0.5bn tap in the Apr-26 linker the day before. Portugal has decided to take advantage of the positive net cash flow in October and will tap the PGB 2.125% 10/28 bond for EUR0.75bn on Wednesday. Given the pressure on Italy the mid-month BTP auctions on Thursday will be scrutinised to see if the higher yields are able to attract investors. Rating announcements Portugal in focus Moody s has Portugal (Ba1/positive) up for review. Moody s is lagging Fitch (BBB-) by one notch and S&P (BBB) by two notches. S&P revised the Portuguese outlook to positive even with their higher BBB rating on 14 September, and it is more than one year ago that Moody s put Portugal on positive outlook. The Portuguese deficit was 3.0% in But the 3.0% deficit includes a EUR3.0bn recapitalisation of state-owned Caixa Geral de Depositos. Without this the deficit would have been 0.9%. The MoF projects a 0.7% deficit in 2018 in line with the target included in April s stability programme. For 2019 the MoF projects a 0.2% deficit. Moody s in its latest update assumed a 1.1% deficit in 2019 based on lower growth assumptions and pessimism about any further material reductions in spending. We argue that Moody s will revise the deficit for 2019 lower and award Portugal an upgrade to Investment Grade on 12 October. The factors Moody s focus on are on slide We are long the 15Y PGB vs swaps and full return to IG should be supportive. Moody s has been lagging the other two rating agencies on Portugal Source: Danske Bank, Rating agencies 2

3 Trade overview: Spain does OK despite BTP jitters We are on the side-lines in respect of BTP exposure but are long Portugal and Spain versus swaps and Bunds, respectively. Despite the jitters in Italy we stick to our long periphery positions. Both economies are still improving and next week we expect Portugal to regain the missing Investment Grade rating from Moody s. Our long 10Y Spain versus Bunds is unchanged and we are still 3bp in the money. Our long 15Y PGB versus swaps has won 4bp over the last week and the position is now 12bp in the red. Our long 15Y Ireland versus swaps remains in the red as the market continues to focus on the risk of a hard Brexit and the expected new 10y-15y green bond. Our long 10Y and 30Y France versus Germany are trading with a small loss. However, we stick to France ahead of major redemptions and coupons in two weeks time (EUR 41.3bn). Italy rock-solid at the bottom Portugal Spain Denmark Netherlands Germany Finland Austria France Ireland Belgium Sweden Norway Italy 2018 ytd Risk-adjusted return on EFFAS 1-10Y bond indices -5.0% 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, Bloomberg, Danske Bank -0.8% -0.9% -0.3% -0.3% -0.3% -0.5% -0.5% 0.0% 0.0% -0.1% 0.4% 0.9% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3

4 yield, % New green bond from Ireland as early as next week The NTMA announced on 1 October in its Q4 issuance plan that it intends, subject to market conditions, to issue a new green bond. The NTMA has been on roadshow and this Monday has invited potential investors to a conference call on the new green bond. The Irish Sovereign Green Bond (ISGB) Documents have also been published by the NTMA. The NTMA funding target for 2018 is EUR14-18bn. YTD EUR13.5bn has been raised in the market. If EUR3bn is raised and EUR0.5bn is tapped on 8 November, total issuance will be EUR17bn. The NTMA expects a year-end cash balance of EUR13.5bn, giving Ireland a very strong cushion against any negative impact from a hard Brexit. If we see Ireland in the market next week we expect the maturity to be in the 10Y to 15Y bracket and that the amount will be EUR3bn. The only IRISH maturing this year (IRISH 4.5% Oct-18, EUR ) is due in two weeks. However, given that the bond was issued in 2007 it is probably one of the Irish bonds that the ECB bought during the SMP programme. As the SMP holdings in this particular bond are likely to be quite sizeable it leaves little room for QE purchases in this bond. This also means that we expect the associated QE reinvestments to be fairly limited. The outstanding amount is EUR8.8bn and on top of that coupons of EUR1.1bn are coming to investors. The new 10Y IRISH 0.9% 5/28 has been underperforming France since it was introduced early this year despite the strong Irish numbers. The underperformance is most likely related to Brexit fears. We still like Ireland and keep both our 10Y and 15Y long positions versus swaps despite recent underperformance. Ireland will be the third eurozone country to go green after France and Belgium. IRISH 10Y has underperformed France this year Brexit concerns are probably the main reason as the economic development is very supportive for Ireland 2.25% 1.75% 1.25% 0.75% 0.25% -0.25% Ireland France -0.75% Maturity Source: Bloomberg, Danske Bank, Macrobond Financial 4

5 ECB: update of capital key amid reinvestment discussions ECB sources yesterday suggested that the update of the capital key is complicating the discussions about the APP reinvestments beyond this year. The capital key is an equal weighting of the country s share in population and GDP, which needs updating every five years. Next time is 1 January While the new capital key is not published by the ECB, our computations show a noticeable increasing share in Germany (0.56pp) and Ireland (0.51pp) while Italy (-0.66pp) and France (-0.47) weigh less. The rest of the countries are broadly unchanged. Draghi keeps on repeating that the capital key is the guiding principle and a stylised application of it at time T (now), would result in Germany being underbought by around EUR0.5bn cumulative since 2015 and Italy overbought by some EUR35bn. This naturally complicates the discussion on the new reinvestment as that would mean that redemptions in IT would change gradually to DE. Nevertheless, ideologically we view the new capital key as the one that should be applied, but politics may intervene. We expect the ECB to announce the new reinvestments (including cap key) at the December meeting, to be applied in a flexible way. We do not expect outright communication of IT redemptions to e.g. DE. ECB sources also suggested that a twist was discussed. However, we highlight that unlike the Fed s operation twist, no sales of the PSPP holdings should be warranted DE FR IT ES NL BE AT PT FI IE SI LT SI LV LU EE MT GR CY Source: ECB, Danske Bank Old capital key (Until Dec18) New cap key (From Jan 19)

6 Italy: the Economic and Financial Document has been released - more questions are raised than answered Italy s Ministry of Economy and Finance has finally released the full Economic and Financial Document (DEF), which outlines the government s budgetary measures for the year 2019 as well as economic projections for the coming three years. For more see our Italian Politics Monitor that we published earlier today. The government has, relative to initial announcements, lowered budget deficits from 2.4% of GDP over the period to 2.1% in 2020 and 1.8% in 2021 respectively. However, the structural balance is still set to worsen by 0.8pp in Still, due to primary balance surpluses the public debt-to-gdp is not expected to increase in the near term, but following a downward trajectory targeting 127% in That being said, this figure is highly dependent on debt servicing costs and growth assumptions, both of which are currently somewhat optimistic. The EU Commission is expected to react negatively asking for a revised budget proposal two weeks after the EU submission deadline of 15 October We continue to be on the side-lines in respect of BTP exposure. In our opinion the DEF raised more questions than it answered. In particular, any official negative reaction from the EU could create more market jitters. For those wanting to dip their toes in we recommend the sub 2y segment. The high yields can be rolled home. We find it very unlikely that we will see a debt restructuring or an exit from the euro in the foreseeable future. Governments GDP forecasts out of line with consensus Significant fiscal easing, but still primary surplus Source: (both charts:) rating agencies, IMF, MoF, Danske Bank 6

7 Supply: possible Irish green bond and more BTP supply week 41 issuer type maturity coupon size Tuesday 09/10 Netherlands NETHER Jan % EUR bn Germany BBRei Apr % Wednesday 10/10 Norway NGB 10Y NOK 3bn Germany Bund Aug % EUR 3bn Portugal PGB Oct % EUR 0.75bn Ireland IRISH Possible Irish Green Bond EUR 3.0bn Thursday 11/10 Italy BTPS EUR 8.5bn Sweden Jun % SEK 0.5bn week 42 issuer type maturity coupon size Tuesday 16/10 Germany Schatz Sep-2020 TBA EUR 4bn Finland RFGB EUR 1bn Wednesday 17/10 Germany Bund Jul % EUR 1.5bn Thursday 18/10 Spain SPGB EUR bn France FRTR 2Y-8Y EUR 8-9bn Source: Danske Bank The positive cash flow in October is of course an open invitation for issuers looking to tap the markets. Ireland could very well be out as early as next week with the new green bond. For more see slide 4. The Netherlands will be in the market on Tuesday with a tap in the 2.75% Jan-47 bond. The DSTA plans to tap up to EUR1bn in the bond. Otherwise we have the German Finanzagentur in the market with a EUR3bn tap in the 10Y Bund (Wednesday) and a EUR0.5bn tap in the Apr-26 linker the day before. Portugal has decided to take advantage of the positive net cash flow in October and will tap the PGB 2.125% 10/28 bond for EUR0.75bn on Wednesday. We expect Moody s to reward Portugal a final IG rating on Friday and we have seen little spill-over from the BTP jitters. Hence, the auction should fare well. Given the pressure on Italy the mid-month BTP auctions on Thursday will be scrutinised to see if the higher yields are able to attract investors. Finally, we have Norges Bank in the market. We look for the usual 10Y tap (announcement on Monday). Sweden will tap a modest SEK0.5bn in the 14Y linker. 7

8 The positive October cash flow has started - Germany to see support next week Coupon + Redemption Week 41 Week 42 Week 43 Week 44 Week 45 Total Germany France Italy Spain Portugal Belgium Netherlands Austria Finland Ireland Slovakia Greece EFSF ESM Total - EUR Denmark Sweden Norway Note: all values are millions, local currency Source: Danske Bank Net cash flow Week 41 Week 42 Week 43 Week 44 Week 45 Germany France Italy Spain Portugal Belgium Netherlands Austria Finland Ireland Slovakia Greece EFSF ESM Total - EUR Denmark Sweden Norway Note: All volumes are in billions, local currency. Note: Negative means more issuance than coupon and redemption 8

9 Supply over the past two weeks - another week with good demand for Scandies week 39 issuer type maturity coupon sold b-t-c avg. Yield Tuesday 25/09 Netherlands NETHER Jan % 2, % Italy CTZ Mar % 1, % Italy BTPei Sep % 1, % Wednesday 26/09 Germany Bobl Aug % 2, % Norway NGB Apr % 3, % Thursday 27/09 Sweden SGBi Jun % % Italy BTPS Oct % 2, % Italy BTPS Dec % 2, % Italy BTPS Sep-2025 FRN 1, % issuer type maturity coupon sold b-t-c avg. Yield Tuesday 02/10 Austria RAGB Jul % % Austria RAGB Feb % % Wednesday 03/10 Denmark DGB 2Y-10Y 0.3% % Denmark DGB 0.5% 2, % Sweden SGB Nov % 1, % Thursday 04/10 Spain SPGB Oct % 2, % Spain SPGB Jul % 1, % Spain SPGB Jan % % Spain SPGBi Nov % % France FRTR Nov % 4, % France FRTR May % 2, % France FRTR 1.3% 1, % Source: Bloomberg, Danske Bank 9

10 Funding overview funding almost completed in Spain after this week s auctions Expected gross bond issuance 2018 Gross Bonds Expected net % issued YtD of expected gross Expected issuance Net issuance issuance maturing issuance Official (Bn) Official estimate* Danske Markets 2018 YtD Danske Markets 2018 YtD estimate Germany % 79% France % 86% Italy % 79% Spain % 92% Portugal % 94% Greece % 60% Belgium % 98% Netherlands % 86% Austria % 95% Finland % 73% Ireland % 90% EU % 80% EFSF % 86% ESM % 46% Total - EUR % 83% Denmark* % 96% Sweden % 77% Norway % 72% *Denmark numbers are notional levels i.e. not taking into account the additional revenue from sale of bonds trading above 100. Source: Danske Bank 10

11 Current trades Open strategies Type Trade Idea Risk & P/L & P/L -10bp We expect Ireland to 'converge' with France, as there are strong fundamentals Brexit risk escalates where 3bp Buy new 10Y IRISH Buy IRISH 05/28 versus relative to France/Belgium and a positive the outlook for an upgrade is 2bp benchmark +2bp rating story, where Ireland is expected to diminished -1bp be upgraded to the 'AA' range 03-Jan-18 Buy 10Y France vs Germany Buy10Y Denmark vs Germany Buy KfW vs Belgium Buy 15Y Ireland vs swaps Buy FRTR 0.75% 5/28 vs DBR 0.5% 30bp Buy DGB 0.50% 11/27 vs DBR Buy KfW 0.375% 03/23) vs BGB 2.25% Buy IRISH 1.3% 05/33 vs France has widened to Germany as the Italian crisis has dominated. We argue that France is a complete different case and that the semi-core tightening will soon start again. Low supply of DGBs, buybacks and switches from the Debt Managment Office is supportive for the Danish government bond market. Furthermore, investors who cannot buy Danish mortgage bonds can buy govts as a substitute Cheap KFW vs. Cheap BGB Strong demand at the auction and ongoing purchase by the ECB. Potential for an upgrade. Modest funding requirement for the rest of 2018 Further spill-over from France. Tapering sell-off as PSPP stops later this year. ECB QE as well as low supply and cheap funding rates for Germany and the Netherlands Brexit risk and change in the rating outlook 23bp 33bp 30bp -3bp 01-Jun-18 0bp 5bp 6bp 1bp 06-Dec-17-2bp 4bp 4bp 0bp 12-Jan-18-5bp 14bp 4bp -10bp 13-Apr-18 Source: Danske Bank 11

12 Current trades Open strategies Type Trade Idea Risk & P/L & P/L 75bp There is limited supply for the rest of 103bp Buy 15Y Portugal vs Buy PGB 2.25% 04/34 vs 2018 of PGBs. There is a new issue Risk-off sentiment, political 91bp swaps premium and ECB is buying more than the problems in Spain and Italy capital key -12bp 06-Apr-18 Buy 10Y Spain vs Bunds Buy 13Y Finland vs. 15Y Netherlands Buy 16Y Austria vs. 16Y Germany Buy 30Y France vs. 30Y Germany Buy 10Y Finland vs. 10Y Austria Source: Danske Bank Buy SPGB 1.4% 04/28 vs DBR 0.5% Buy RFGB 0.35 '31 vs. Nether 2.5% Buy RAGB 2.4% 05/34 vs. Bund 4.75% Buy France 2.25% 05/48 vs. Bund 1.25% 54bp Buy RFGB 2.75% 07/28 vs RAGB 0.75% Spain has widened as the Italian crisis has dominated. We argue that Spain is complete different case. The new Socialist government will also be fiscal prudent and is pro-europe. Netherlands and Germany has outperformed in the 10Y to 30Y segment. Upcoming supply from Germany and Netherlands as well as buy-backs from ECB in the QE programme should be supportive for semi-core Austria is looking cheap relative to Germany in the 10Y to 30Y segment. The Frence government yield curve is very steep relative to the Germany curve. This is driven from the long Finland has underperformed Austria in the 8-10Y segment after the outlook on Austrian government bonds was changed to positive and ahead of the supply from Finland in Q3 Further spill-over from Italy. Political uncertainty in Spain with the new government. The lack of supply of Dutch government bonds as the funding requirement is revised downwards The lack of supply of German government bonds The lack of supply of German government bonds Austria recieves an upgrade to AAA ahead of Finland 70bp 101bp 104bp 3bp 01-Jun-18 2bp 7bp 7bp 0bp 09-Aug-18 25bp 35bp 33bp -2bp 09-Aug-18 45bp 59bp 54bp -5bp 09-Aug-18-7bp -2bp -2bp 0bp 09-Aug-18 12

13 Closed trades Closed strategies Type Trade Idea Risk & P/L & P/L Buy the new 10Y 70bp Portuguese Fiscal slippage in the Solid fundamentals and the possibity of a 70bp benchmark. Profit Buy PGB 2.125% 10/28 vs Portuguese economy and further upgrade is very supportive for 114bp taken March 9, 2018 increased political risk in Portuguese government bonds as profit target Spain. Abrupt end to QE 44bp reached. 12-Jan-18 Buy DKK break-even inflation - closed on March 23- Profit target reached Buy the new 10Y Spanish benchmark. Closed on April 5. Profit taget reached Buy 5y BTP vs 2y Schatz. Closed May 28 at the opening. Buy the Bund ASW spread. Closed on July 13, 2018 Buy 5Y Sweden vs Germany. Closed August 17, 2018) Buy DGBi 0.1% 11/23 vs DGB 1.5% Buy SPGB 1.4% 4/28 vs Buy BTPS 0.95% 3/23 vs BKO 0% 3/20 Buy the Bund ASW Buy SGB 1.5% 11/23 vs OBL 0% The monthly inflation fixings in Denmark are expected to be higher than 1.1% in the first half of Furthermore, the Danish Central Bank will launch a new 12Y linker, and we expect there to be switches between the old and the new linker Solid fundamentals and the possibility of further rating upgrades is supportive for government bonds. Very strong demand seen at syndication. Investors still looking for carry The 5y segment of the curve offers the best carry and market to postposne first ECB hike further There is a negative net supply of German government bonds in Q1. This is usually very supportive for the Bund ASW spread, and we see a widener of the Bund spread of c.10bp from mid-january The combination of a steep curve as well as scarcity in the SGB market due to the Riksbank frontloading reinvestments in 2018 and very modest supply is positive for SGBs A decline in inflation Fiscal slippage in the Spanish economy and incrased political risk (Catelonia). Spillover from Italy, if election in March goes badly.abrupt end to ECB QE. Political risk is Italy and early ECB hikes Heavy issuance hedged by Bunds or a sharp sell-off as seen in 2015 The Riksbank turns more hawkish as inflation rises more than expected and housing market stabilises 1.30% 1.31% 1.10% 21bp 06-Dec-17 25bp 21bp 46bp 25bp 26-Jan bp.190bp 126bp -64bp 06-Apr-18 55bp 55bp 46bp 9bp 06-Dec-17 15bp 34bp 38bp 4bp % Source: Danske Bank 13

14 Closed trades Closed strategies Type Trade Idea Risk & P/L & P/L Buy 5Y Finland vs Belgium (closed September 7, 2018) Buy Denmark vs Netherlands (closed September 7, 2018) Buy 5Y Denmark vs Netherlands (closed September 7, 2018) Source: Danske Bank Buy RFGB 1.5% 04/23 vs BGB 2.25% Buy DGB 0.50% 11/27 vs Nether 0.75% - 2bp Buy DGB 1.5% 11/23 vs Nether 1.5% The fundamental outlook and the possibility of an upgrade is better in Finland than in Belgium. Furthermore, scaling down QE will dimish the purchase in BGBs. Political uncertainty in Belgium Low supply of DGBs, buybacks and switches from the Debt Managment Office is supportive for the Danish government bond market. Furthermore, investors who cannot buy Danish mortgage bonds can buy govts as a substitute Denmark has been under pressure since the start of the year, but with Danish Debt Office buying back bonds, and the low supply - then the spread should tighten Upward revision of the borrowing requirment in Finland. QE purchase in BGB continues to be above the capital key ECB QE as well as low supply and cheap funding rates for the Netherlands Continued pressure from the Danish mortgage market -6bp -6bp 0bp 6bp 12-Jan-18-8bp -7bp -2bp 5bp 06-Dec-17 0bp 3bp 9bp 6bp 22-Feb-18 14

15 Fixed income top trades 2018 Trades Closed Comment P/L #1: Sell 1Y10Y ATMS EUR straddle 05/12/ /02/2018 Stop loss -125cts #2: 1Y forward 2Y-10Y flattening of the USD swap curve 05/12/ /04/ bp #3: Pay 2Y3M USDOIS versus receive 1Y3M USDOIS 05/12/ /05/2018 Hit target 24.8bp #4: Buy Bund spread 05/12/ /07/2018 Hit target 9bp #5: Buying the new 10Y PGB and the new 10Y IRISH government bond at the expected syndication 05/12/2017 PGB bp/0bp #6: Buy 30Y 2% callable bonds against DGBs 05/12/ /01/ pts #7: Buy 5Y non-callable bonds against DGBs (enter late December) 05/12/ % #8: Buy DGBi 0.1% 2023 vs DGB 1.5% /12/ /03/2018 Hit target 20bp #9: Buy DGB 0.5% 11/27 relative to EU peers such as Bund 08/27(open) and DSL 11/27 (closed) 05/12/ /11/2018 vs DSL closed 0bp/5bp #10: Buy SGB 1.5% 11/23 (SGB1057) vs Bobl 05/12/ /08/2018 Closed with profit 4bp #11: Receive MAR-19 SEK RIBA 05/12/ /09/2018 Closed with profit 22.0bp #12: Receive 1Y1Y USDSEK CCS 05/12/ /05/2018 Stop loss -6.1bp #13: Receive 1Y1Y SEK vs EUR and pay 5Y5Y NOK vs EUR 05/12/ /05/2018 Hit target 31.3bp #14: Receive 1Y1Y USDNOK CCS 05/12/ /05/2018 Stop loss -8.6bp #15: Receive EUR 1Y1Y-2Y1Y-3Y1Y EUR swap fly 20/12/ /05/ bp #16: Receive Dec-18 to Mar-19 EONIA swap 11/01/ /03/ bp #17: Reveive 1Y1Y EUR real rate 01/03/ /04/ bp #18: Sell 1Y5Y ATMF EUR payer swaption 01/03/ /03/ cts #19: Tactical 5Y-30Y EUR steepener 5Y fwd 01/03/ /06/ bp #20: Sell 10Y10Y vs buy 1Y1Y euro HICPxt inflation swap 01/03/ /05/ bp #21: Receive 2Y2Y EUR swap 20/03/ /05/ bp Note: Note: The estimated P&L includes roll-down Note: Our Fixed Income Top Trades 2018 include derivatives trades as well as bond trades. Source: Danske Bank 15

16 An overview of the 12M carry in selected EU government bonds The 5Y and 10Y segments provide the best carry but in Italy it is the 2Y and 5Y segments GERMANY Segment 12mth horzizon "Coupon" Carry -0.55% -0.09% 0.52% 0.73% 0.91% 1.12% Roll-down 0.07% 0.64% 0.95% 0.60% 0.40% -0.11% Total carry -0.48% 0.56% 1.47% 1.33% 1.31% 1.01% Total carry + funding 0.14% 1.13% 2.05% 2.03% 1.50% 1.51% Total carry + funding (riskadjusted) 0.07% 0.21% 0.21% 0.11% 0.06% 0.05% Funding rate -0.62% -0.58% -0.59% -0.70% -0.56% -0.49% NETHERLANDS Segment 12mth horizon "Coupon" Carry -0.53% 0.00% 0.55% 0.87% 0.97% 1.18% Roll-down 0.08% 0.85% 0.58% 0.91% 0.45% 0.63% Total carry -0.45% 0.86% 1.13% 1.78% 1.42% 1.81% Total carry + funding 0.06% 1.35% 1.70% 2.38% 2.01% 2.44% Total carry + funding (riskadjusted) 0.01% 0.26% 0.14% 0.15% 0.09% 0.08% Funding rate -0.51% -0.50% -0.57% -0.60% -0.59% -0.59% FRANCE Segment "Coupon" Carry -0.44% 0.07% 0.83% 1.17% 1.36% 1.72% Roll-down 0.13% 0.74% 1.09% 0.89% 0.14% 0.81% Total carry -0.32% 0.81% 1.92% 2.06% 1.50% 2.53% Total carry + funding 0.18% 1.31% 2.42% 2.56% 2.00% 3.03% Total carry + funding (riskadjusted) 0.09% 0.24% 0.25% 0.17% 0.09% 0.12% Funding rate -0.50% -0.50% -0.50% -0.50% -0.50% -0.50% BELGIUM Segment "Coupon" Carry -0.45% 0.13% 0.90% 1.28% 1.52% 1.80% Roll-down 0.11% 0.97% 1.06% 1.25% 0.39% 0.84% Total carry -0.33% 1.10% 1.96% 2.53% 1.91% 2.64% Total carry + funding 0.17% 1.58% 2.48% 3.24% 2.50% 3.25% Total carry + funding (riskadjusted) 0.08% 0.31% 0.26% 0.23% 0.14% 0.14% Funding rate -0.50% -0.48% -0.51% -0.71% -0.59% -0.61% SPAIN Segment "Coupon" Carry -0.12% 0.61% 1.54% 2.03% 2.23% 2.65% Roll-down 0.24% 1.06% 0.89% 2.16% 0.56% 0.73% Total carry 0.12% 1.67% 2.43% 4.19% 2.79% 3.38% Total carry + funding 0.60% 2.12% 2.90% 4.65% 3.28% 3.98% Total carry + funding (riskadjusted) 0.28% 0.40% 0.27% 0.35% 0.17% 0.19% Funding rate -0.49% -0.45% -0.47% -0.46% -0.49% -0.60% IRELAND Segment "Coupon" Carry -0.41% 0.21% 1.08% 1.53% 1.71% 1.91% Roll-down 0.08% 0.75% 1.17% 1.09% 0.56% 0.32% Total carry -0.33% 0.96% 2.24% 2.62% 2.27% 2.23% Total carry + funding 0.17% 1.53% 2.70% 3.15% 2.81% 2.70% Total carry + funding (riskadjusted) 0.08% 0.28% 0.28% 0.24% 0.17% 0.11% Funding rate -0.50% -0.57% -0.45% -0.53% -0.55% -0.47% ITALY Segment "Coupon" Carry 0.90% 1.95% 2.90% 3.20% 3.48% 3.35% Roll-down 0.56% 0.70% 0.81% 0.13% 0.87% -1.40% Total carry 1.46% 2.64% 3.71% 3.32% 4.35% 1.95% Total carry + funding 1.92% 3.11% 3.96% 3.64% 4.55% 2.42% Total carry + funding (riskadjusted) 0.94% 0.65% 0.41% 0.31% 0.32% 0.14% Funding Note. rate The funding rate is an indicative -0.47% price -0.47% for the repo -0.40% rate for -0.49% the bonds -0.39% -0.47% Source. Danske Bank PORTUGAL Segment "Coupon" Carry -0.08% 0.67% 1.86% 2.37% 2.70% 3.07% Roll-down 0.14% 1.12% 0.93% 0.92% 0.94% 0.40% Total carry 0.06% 1.79% 2.79% 3.29% 3.63% 3.46% Total carry + funding 0.54% 2.35% 3.30% 3.86% 4.02% 3.95% Total carry + funding (riskadjusted) 0.25% 0.42% 0.35% 0.30% 0.23% 0.17% Funding rate -0.48% -0.55% -0.51% -0.56% -0.38% -0.49% 16

17 Portugal Moody s Moody s: October 12 Portugal Moody's S&P Fitch Rating Ba1 BBB- BBB Outlook Positive Positive Stable Potential rating decision 12 October November 2018 Requirement for upgrade Portugal's government bond rating would be upgraded to investment grade should we conclude that the positive economic and fiscal trends are likely to be sustained and we are confident that the very high debt burden will move to a steady, downward trend following its first notable decline last year. That conclusion would be supported by sustained fiscal improvements pointing to a more consistent record of primary surpluses going forward, by evidence that economic growth continues to remain broad-based, suporting the economy s resilience to shocks, and by ongoing progress in the recapitalisation of the weakest banks. We could raise our ratings on Portugal if the economy continues to deleverage externally at its current pace of 3%-5% of GDP per year, a processs that would reduce the country's still high stock of net external debt. We could also consider raising the ratings if credit conditions in Portugal converge further toward the eurozone average, improving the transmission of the European Central Bank's (ECB's) monetary policy. Specifically, we will monitor funding costs and the still-high levels of nonperforming loans (NPLs) in the banking system. The main factors that could, individually or collectively, lead to a positive rating action: - Track record of further substantial decline in the GGGD-to-GDP ratio; - Evidence of significantly stronger potential growth over the medium term, exceeding 2% without jeopardising the necessary external adjustment; and - Continued strong export growth that leads to widening current account surpluses and rapid decline in NXD. Requirement for downgrade The positive outlooks signals that the rating is unlikely to move down over the next months. However, the outlook could be stabilised were we to conclude that the commitment of the government to fiscal consolidation and debt reduction, or its capacity to achieve that objective, were to wane. Weaker than expected economic growth or a sharp rise in interest costs, including from a negative confidence shock, would require further fiscal measures to achieve a consistent reduction in the debt burden, which, if not forthcoming, would undermine the basis for a positive outlook. The need for unforeseen further recapitalisation support for the weakest banks, beyond the limits agreed with the EC, would be similarly negative for the rating. We could revise the outlook to stable if we saw a marked weakening in economic growth or a lack of progress in implementing growth-enhancing structural reforms. We could also revise the outlook to stable if the government's budgetary position deteriorated, contrary to our expectations, or if we saw a reversal in Portugal's ongoing external adjustment. The main factors that could, individually or collectively, lead to a negative rating action: - Reversal of the decline in the GGGD-to- GDP ratio; and - Renewed stress in the financial sector that requires significant additional public sector support and/or affects financial stability and growth outlook. Source: Fitch, S&P, Moody s 17

18 Portugal Moody s Moody s: October 12 Source: Fitch, S&P, Moody s, European Commission 18

19 Current rating and outlook RATINGS OUTLOOK Fitch Moody's S&P DBRS Germany AAA Aaa AAAu AAA Finland AA+ Aa1 AA+ AAH Netherlands AAA Aaa AAAu AAA Austria AA+ Aa1 AA+ AAA Belgium AA- Aa3 AAu AAH France AA Aa2 AAu AAA Ireland A+ A2 A+ AH Italy BBB Baa2 *- BBBu BBBH Spain A- Baa1 A-u A Portugal BBB Ba1 BBB-u BBB UK AA Aa2 AAu AAA Denmark AAA Aaa AAA AAA Sweden AAA Aaa AAAu AAA Norway AAA Aaa AAA AAA Slovenia A- Baa1 A+ A Cyprus BB+ Ba2 BBB- BB Greece BB- B3 B+ BH EFSF AA Aa1 AA WR ESM AAA Aa EU AAA Aaa Source: Moody s, Fitch, Standard & Poor s, DBRS Fitch Moody's S&P DBRS Germany STABLE STABLE STABLE STABLE Finland POS STABLE STABLE STABLE Netherlands STABLE STABLE STABLE STABLE Austria POS STABLE STABLE STABLE Belgium STABLE STABLE STABLE STABLE France STABLE POS STABLE STABLE Ireland STABLE STABLE STABLE STABLE Italy NEG NEG WATCH STABLE STABLE Spain STABLE STABLE POS STABLE Portugal STABLE POS POS STABLE UK NEG STABLE NEG STABLE Denmark STABLE STABLE STABLE STABLE Sweden STABLE STABLE STABLE STABLE Norway STABLE STABLE STABLE STABLE Slovenia STABLE STABLE POS STABLE Cyprus POS STABLE STABLE POS Greece STABLE POS POS POS EFSF STABLE POS STABLE STABLE ESM STABLE POS --- STABLE EU STABLE STABLE STABLE STABLE Source: Moody s, Fitch, Standard & Poor s, DBRS 19

20 Rating calendar for 2018 Moody's Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany France 4 26 Italy 16 ( * ) Spain 13 5 Portugal Greece Belgium Netherlands 2 27 Austria Finland Ireland 13 5 Denmark 18 9 Sweden 2 24 Norway Not scheduled Source: Moody s, Fitch, Standard & Poor s, DBRS - *Extended to no later than 31/10 Fitch Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 9 3 France Italy Spain Portugal 1 30 Greece Belgium 1 30 Netherlands Austria Finland 9 3 Ireland Denmark Sweden 2 27 Norway Source: Moody s, Fitch, Standard & Poor s, DBRS S&P Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany France 6 5 Italy Spain Portugal Greece Belgium Netherlands Austria Finland Ireland 1 30 Denmark Sweden 2 31 Norway Source: Moody s, Fitch, Standard & Poor s, DBRS DBRS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 8 7 France Italy Spain 6 28 Portugal Greece 4 20 Belgium Netherlands 9 10 Austria Finland 2 20 Ireland Denmark Sweden 4 26 Norway Source: Moody s, Fitch, Standard & Poor s, DBRS 20

21 Disclosures This research report has been prepared by Danske Bank A/S ( Danske Bank ). The authors of this research report are Arne Lohmann Rasmussen, Chief Analyst, Jens Peter Sørensen, Chief Analyst, Philip Toft Lyngsø, Assistant Analyst, Aila Mihr, Analyst, and Piet P. H. Christiansen, Senior Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. Danske Bank s research reports are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Danske Bank is not registered as a Credit Rating Agency pursuant to the CRA Regulation (Regulation (EC) no. 1060/2009); hence, Danske Bank does not comply with nor seek to comply with the requirements applicable to Credit Rating Agencies. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank is a market maker and liquidity provider and may hold positions in the financial instruments mentioned in this research report. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to the companies mentioned in this publication and have whatever rights are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding the companies mentioned in this publication that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual fixed income asset. We base our conclusion on an estimation of the financial risk profile of the financial asset. By combining these risk profiles with market technical and financial assetspecific issues such as rating, supply and demand factors, macro factors, regulation, curve structure, etc., we arrive at an overall view and risk profile for the specific financial asset. We compare the financial asset to those of peers with similar risk profiles and on this background, we estimate whether the specific financial asset is attractively priced in the specific market. We express these views through buy and sell recommendations. These signal our opinion about the financial asset s performance potential in the coming three to six months. 21

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