Room for tighter asset swap spreads as issuance picks up Senior Analyst Senior Analyst Peter Possing Andersen Lars Tranberg Rasmussen +45 4513 719 + 45 4512 8534 pa@danskebank.dk laras@danskebank.dk
Trade recommendation Sell Sept Bund asset swap spread future Entry: Scale in with ½ amount @ 68.3 basis points and further ½ amount @ 8 if this level is reached. Target: 35 Stop: 9 Sell Sep Bobl asset swap spread future Entry: Scale in with ½ amount @ 78.1 and further ½ amount @ 9 if this level is reached Target: 45 Stop 1 Alternative implementation Asset swap package on Bund / Bobl bonds December futures when coming closer to September delivery. 2
Asset swap spreads very wide - Bund asset swap spread close to financial crisis high 11 1 9 8 7 5 4 3 2 1 Oct Jan 8 Source: Danske Markets Schatz asset swap spread Apr Jul Oct Jan 9 Bobl asset swap spread Bund asset swap spread Apr Jul Oct Jan 1 Apr 11 Jul 11 1 9 8 7 5 4 3 2 1 3
Bund asset swap spreads fundamentally wide 8 Model on public deficit, privat NFC debt gross issuance, basis spread, 6m fixing, 1yr gov 4 8 4 2 3 1-1 -3 EUR 1yr (simple) swap spread Residual +/- two standard deviations 97 98 99 1 2 3 4 5 6 7 8 9 1 11 2 3 1-1 -3 Source: Danske Markets and Reuters Ecowin 4
Bund spread have been trading in tandem with PIIGS - but no tightening, so far, as bank CDS and MM basis are trading wider PIIGS yields have moved lower on SMP buying but the basis and CDS spreads have widened 7 65 55 5 45 4 35 3 25 2 15 Jan << Model on GDP weighted PIIGS 1yr sovereign yield vs Bunds (allowing for different coefficients on Ita-Spa and Grc-Ire-Prt) Bund asset swap spread 1st future >> Feb Mar Apr May Jun Jul Aug 11 7 65 55 5 45 4 35 3 25 2 15 275 25 225 2 175 15 125 1 75 5 25 Itrax financial senior 3M Euribor - 3M EONIA 8 9 1 11 275 25 225 2 175 15 125 1 75 5 25 Source: Danske Markets and Reuters Ecowin Source: Danske Markets and Reuters Ecowin 5
Very low issuance activity in recent months - the pipeline could be rather big when the market opens Gross issuance close to record low net issuance lower than during the financial crisis 1 EUR bln EUR bln 14 Gross issuance EUR bonds ex. govies +3yr maturites, 3-months avg 12 1 8 4 2 1 14 12 1 8 4 Maturing EUR bonds ex. govies 2 +3yr maturities 3 months avg 5 6 7 8 9 1 11 12 Source: Dealogic 1 9 8 7 5 4 3 2 1-1 -2 EUR bln Net issuance EUR excl. govies +3yr maturities (3 months average) EUR bln 1 9 8 7 5 4 3 2 1-1 -2 5 6 7 8 9 1 11 Source: Dealogic Note: The chart shows gross issuance and maturing issues over a 3-month window for bonds issued with a maturity at above 3 years. In the coming months a lot of existing debt will mature Note: The chart shows the difference between gross issuance and maturing bonds issued with a maturity of above 3 years 6
Issuance activity usually picks up in September 1.5 1.4 1.3 1.2 1.1 1..9.8.7.6.5.4.3 Seasonal factor, gross issuance EUR ex govies +3yr maturities (2-present) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1.5 1.4 1.3 1.2 1.1 1..9.8.7.6.5.4.3 Source: Danske Markets 7
If issuance picks up, there is room for tighter ASW spreads - but watch out for the bank CDS spreads 1 2 3 4 5 7 8 9 1 11 12 13 EUR bln << EUR ex. govies gross issuance +3yr maturities, 3 month cma (inverted scale) Bund asset swap spread >> 8 9 1 11 7 5 4 3 2 1-1 275 25 225 2 175 15 125 1 75 5 Sep Jan 8 << Itrx senior financial May Sep Jan 9 Bund asset swap spread >> May Sep Jan 1 May 11 8 7 5 4 3 2 1 Source: Danske Markets, Reuters Ecowin 8
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