SEK rates: 2021 17 December 2020 - Nordea e-Markets
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17 December 2020 SEK rates: 2021 Mats Hydén Chief Analyst +46 8 407 91 04 mats.hyden@nordea.com Completion timestamp: 17 December 2020 14:30 CET Dissemination timestamp: 17 December 2020 15:00 CET
Riksbank: “In the old days”… A few ultra-long historic charts
Governor Ingves in his recent speech described large-scale asset purchases as not particularly unconventional and suggested that central bankers around the world
simply is doing what they always been doing as policy measures used “in the old days” are being rediscovered. On this topic we present a few related charts.
1. CPI & short-term rate. The current secular trend in inflation does not stick 2. Government Debt. Current debt sticks out as very low. A good thing as
out in a 400y perspective, but the secular trend in the policy rate looks unnatural. long as low nominal debt is not hiding real world liabilities or is a reflection
of an unbalanced fiscal and monetary policy mix.
3. Riksbank’s balance sheet. Large spikes in balance sheet seen in times of war (1809, 4. Composition in Riksbank’s balance sheet. “In the old days”, the
1945 although not around WWI or 30y war) or extreme policy intervention (1777 Riksbank both gave direct loans to the government and to the private
“Myntrealisationen”, 1992 defence of fix SEK peg, 2021 pre-emptive crises management) sector. For a few decades during the 1900s it owned domestic securities,
but nothing like we see today.
2Duration & covereds: Yet not unneutralized
1. Bias on duration and covereds
Duration In the following slides we present charts and updates on
several sub-components in our intuitive duration bias process. Bonds
enter 2021 with high valuations. Downside risks to equity market (and
thus upside risk to bond prices) should be contained by central banks
safe-guarding the early phase of the economic recovery. Riksbank’s
policy cycle should come closer to switching from “easing” to “on-hold”.
The outlook for economic activity in 2021 looks favourable. The early
phase of 2021 could very well offer both a strong momentum and 2. Covereds’ return advantage over SGBs evaporating
positive surprises in economic data. There is a clear potential bond
yields to be pushed higher. Although our current bias is neutral, see
more avenues to a short bias during Q1 than to a long bias.
Covereds Spreads are low and the curve flat. Some investor may start
consider the cost of being short covereds versus SGBs as a low price
for liquidity. Still, an over-liquified money-market may start to play tricks
with covered funding rates on the downside. So there seems to be
factors at work for both wider and tighter spreads. We see risk balanced
and the development during Q1 will progressively determine our bias on
covereds. We remain neutral.
3. The duration bias process
3Duration: Momentum and outlook for activity will start to speak for higher bond yields
1. Although GDP-models based on historical lags in macro series or financial prices 2. Although it seems that no one understands the creative process of
for obvious reasons failed to predict the pandemic downturn, changes in underlying inflation, traditional gauges all point at low forward looking price pressure.
conditions may still be relevant for the outlook (positive for 2021).
4. Pessimistic forecasters have been proved wrong this year, but more
3. Coincident indicators such as PMIs or other weighted survey data should have more to positive surprises may be in the making in 2021…
go on the upside during H1 as the rebound so far is not that impressive.
4Duration: Engineered equity rally no obstacle to higher yields but sticky volatility is
1. Financial engineering by central banks have compressed credit spreads and long- 2. Although equity market volatility has decreased a lot since peak levels during
term bond yields in general, thus creating a rather unnatural equity rally despite the pandemic, the “half-life” of volatility has not decreased as much
depression-like output gaps. But central banks (or inflation) holds the key to any (measurement of how fast volatility fades). Sticky volatility may lead to more
reversal. May take a while… frequent flare-ups of vol, that would make it difficult to build conviction for short
duration bias in 2021…
Today
Start 2020
3. Equity vs bonds. Valuations in term of PE ratios are no doubt high (downside risk to bond yields) but central banks are holding discount yields low, liquidity
is ample and volatility consequently low. Hard to spot the reversal to strong upward trend in equities.
5Duration: Easing cycle likely to grind to a halt in 2021
1. Riksbank usually goes with the flow (except when it covertly target the 2. The yield curve shows limited probabilities for any change of the policy rate.
currency). And when the flow stops, the Riksbank stops.
4. The government is also pushing a bit on the economy, but during H2 2020
3. The extension of QE to the end of 2021 was a bond bullish move, no doubt. But it outcomes have indicated that not all stimulus is reaching the “end-users”. Shows
may take a while before another easing policy decision is made... that parts of fiscal stimulus package was reactive, i.e. covering up for lost output
(natural stabilizers) rather than active fiscal stimulus.
6Duration: Make no mistake, bonds are rich
1. Let’s not dwell in past times longer than needed to conclude that nominal 2. Comparing yield with duration to yield without duration, we note that “regime
yields are low. shifts” to lower yields and policy rates have bailed out bond returns at each point
where bond duration have started to look very rich. This time may be different.
3. The excess return i.e. the horizon return in long-term tenor minus the yield in a 4. And the fact that bonds have been even richer during 2020 does not in our
short-term rate (say a 1y yield), is at low levels. This makes bonds look rich. opinion change that conclusion that bonds simply are RICH.
Source: Nordea
7Trade Ideas: It’s beginning to look a lot like 2021
Theme Outlook 2021 Trade nudges
Riksbank policy rate There will be no rate hike for sure. Cut not likely, but Riksbank could panic as Receive SEK 5y swap vs EUR (v3m) at the top the
inflation plunge and economy normalizes, delivering a late cut in say range 50-60 bps or receive green FRAs vs Euribor
September. at the top of the range.
Front-end liquidity Riksbank has flushed the system through QE & eased collateral rules. Bank’s Receive 2021 FRAs when above RIBAs. Sell SGB
liquidity reserves at start of 2021 may turn out “too large” as fast money exit 1057 vs swaps. Buy covered ASWs on upticks, if
covered bond market due to spread compression (gross balance of covered there even will be any.
bond repos in system should dwindle).
SGBs (issuance & QE) 5bn/auction should still be enough for Debt Office to target squeezed bonds Sell 10y SGB ASWs but monitor the SGB/covered
and slowly ease scarcity. Riksbank under-weights SGBs in QE for Q1. spread and the relative repo spread to hedge
However, beware that at some level of the SGB/covered spread, more temporary widening.
significant reallocations from covereds into govies may materialize. This could
have more of an impact on SGBs than on covereds…
KI & covereds Covereds may benefit from excessive money-market liquidity (risk for lower Buy KI and covered ASW on upticks. Buy 5y KI vs
(issuance & QE) repo rates), but the Riksbank favours munis. Issuance outlook for 2021 muted. covereds at spread -5bps or higher.
Mortgage lending Households will likely continue to fix mortgage rates. Could local governments Pay SEK 2-3y or 5y swaps vs EUR at lows of the
be next. Continued paying pressure in 2-3y swaps, and possibly at longer recent trading range.
tenors as well.
Business cycle The global and Swedish economy should gain momentum in 2021 while Steepen the 5y+ curve (SEK 1y7y/1y15y for
central banks (and the Riksbank) stay behind the curve. Fiscal policy will likely example). Steepen the SGBi real rate curve. Buy 5y
continue to be supportive for the economy. covereds, sell 10y SGBs.
3. Relative value trade ideas
8References: Publications year-to-date Swedish interest strategy publications year-to-date: … 10-Dec-2020 THURSDAY1500: Stibor flooded with hot SEK liquidity 8-Dec-2020 SEK linkers: The struggle of real rates, the currency and BEI 23-Apr-2020 THURSDAY1500: Riksbank in emergency mode, but no cut 4-Dec-2020 SEK covereds: Supply update November 16-Apr-2020 THURSDAY1500: Issuance under the Riksbank’s umbrella 3-Dec-2020 THURSDAY1500: Play it like the Riksbank, add a steepener 15-Apr-2020 SEK rates: Stibor and the ghost of collateral 1-Dec-2020 SEK rates: A new over-night reference rate 8-Apr-2020 SEK rates: SGB issuance and consequences for bond yields 26-Nov-2020 THURSDAY1500: Riksbank take-aways 3-Apr-2020 SEK covereds: Supply update March 25-Nov-2020 SEK covereds: A deeper look into the QE purchases 2-Apr-2020 THURSDAY1500: Long 23-Nov-2020 SEK covereds: Legal EU harmonization and the implications… 1-Apr-2020 SEK rates: More SGBs, but first a lot more bills 19-Nov-2020 THURSDAY1500: A scent of balance sheet in the air 26-Mar-2020 THURSDAY1500: In the Riksbank and covereds we trust 13-Nov-2020 SEK rates: A look at the new 25y SGB (1063) 25-Mar-2020 SEK rates: Stibor ahead of the USD auction 12-Nov-2020 THURSDAY1500: Whiplashed back to neutral 24-Mar-2020 SEK rates: Preview on new government 10y (SGB 1062) 10-Nov-2020 SEK linkers: No love from policy makers 19-Mar-2020 THURSDAY1500: thoughts on SGBs and covereds 5-Nov-2020 THURSDAY1500: 10y SGB ASW a touch too wide 17-Mar-2020 SEK linkers: Preview on the bond switches to SGBi 3114 4-Nov-2020 SEK covereds: Supply update October 13-Mar-2020 SEK rates: Stibor and the battle of liquidity against credit 29-Oct-2020 THURSDAY1500: A sacrifice to the Bull God 12-Mar-2020 THURSDAY1500: Off 22-Oct-2020 THURSDAY1500: From long to neutral in covereds 5-Mar-2020 THURSDAY1500: Yield curve control, anyone? 21-Oct-2020 Stibor: Certainly uncertain going into year-end 4-Mar-2020 SEK covereds: Supply update February 15-Oct-2020 THURSDAY1500: Borrowing report preview 27-Feb-2020 THURSDAY1500: Bonds rule the world 8-Oct-2020 THURSDAY1500: Don’t fight the gorilla in SEK swap 20-Feb-2020 THURSDAY1500: A good place in the bubble of everything 5-Oct-2020 SEK covereds: Supply update September 18-Feb-2020 SEK rates: The fall of Stibor 1-Oct-2020 THURSDAY1500: Two flavours of steepening 13-Feb-2020 THURSDAY1500: Getting to neutral 24-Sep-2020 THURSDAY1500: Inflation expectations key for rate cut 13-Feb-2020 SEK rates: More government borrowing in pipeline 17-Sep-2020 THURSDAY1500: Guiding the bond-buying monster with a steady hand 12-Feb-2020 SEK linkers: Real index after the switches 10-Sep-2020 THURSDAY1500: Time to think about the year-end 11-Feb-2020 SEK rates: Bond index outlook 3-Sep-2020 SEK covereds: Supply Update August 6-Feb-2020 THURSDAY1500: Riksbank silence 3-Sep-2020 THURSDAY1500: Rising equity vol a threat to higher yields 5-Feb-2020 SEK covereds: Supply update January (the Meltup part 2) 27-Aug-2020 THURSDAY1500: Ups and downs in the wave of cheapening 30-Jan-2020 THURSDAY1500: Crushed by the Virus 20-Aug-2020 THURSDAY1500: Illusions of higher yields 28-Jan-2020 SEK linkers: Preview on the new 10y index-linked bond 13-Aug-2020 THURSDAY1500: From long to neutral duration bias 23-Jan-2020 THURSDAY1500: Everything is melting up, why shouldn’t covereds 11-Aug-2020 SEK linkers: Value in SGBi 3108 ahead of July CPI 21-Jan-2020 SEK rates: Maturity preferences, house prices and the curve slope 6-Aug-2020 THURSDAY1500: More of the same 16-Jan-2020 THURSDAY1500: The character of growth 6-Aug-2020 SEK covereds: Supply update July 16-Jan-2020 SEK rates: Good risk-reward in 5/10y steepeners 6-Jul-2020 SEK covereds: Supply update June 14-Jan-2020 SEK linkers: 10y BEI rich, SGBi 3102 cheap 25-Jun-2020 THURSDAY1500: The Riksbank moves later, not now 09-Jan-2020 THURSDAY1500: A barren wasteland with a gust of higher yields 11-Jun-2020 THURSDAY1500: Transition to longness 09-Jan-2020 SEK covereds: Supply update December 10-Jun-2020 SEK linkers: Value in outright break-evens, but… 08-Jan-2020 SEK rates: The rise of Stibor 4-Jun-2020 THURSDAY1500: The untwisting of spread curves 03-Jan-2020 SEK covereds: Liquidity reserves on the horizon 4-Jun-2020 SEK covereds: Supply update May 28-May-2020 THURSDAY1500: The Great Spread Death 19-May-2020 SEK rates: Borrowing report take-aways 14-May-2020 THURSDAY1500: Cheap long-end SGBs reflect potential… 12-May-2020 SEK rates: Preview Debt Office borrowing report 7-May-2020 THURSDAY1500: Waiting for the supply-day 7-May-2020 SEK covereds:Supply update April … 9
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