There were only small movements in real yields over the past couple of weeks despite a big decline in nominal rates. Hence, BEI rates have declined some 11bp, in a roughly parallel move along the whole curve. The reason is the much-lower-than-expected inflation reported at the beginning of last week. However, over the latest trading sessions, BEIs are fairly unchanged despite a continued decline in nominal bond yields. This might be taken as a sign that BEI rates have, more or less, bottomed out at a very low level.
We continue to regard the current pricing as inconsistent as we expect a super-low CPIF (CPI excluding interest rates) over the next few years and, at the same time, we expect the Riksbank to lift the repo rate. Either the market is pricing hikes too soon or it is expecting inflation to be too subdued over the next few years. The market is pricing hikes equal to 125bp over the next four years despite expecting inflation to be very low. Indeed, we expect CPIF to be the lowest ever recorded over the next four years. Over a four-year period, CPIF has not been below 1.25%, whereas the market is pricing average inflation over the next four years of 0.9%. The Riksbank is not committed to forward guidance but we think repo rate hikes are conditional on inflation moving considerably higher from here, close to the inflation rate target. The central bank has come in for heavy criticism over the past year or so for not being able to reach the inflation target for several years, thus the Riksbank will not hike unless inflation is moving significantly higher. Hence, either the pricing of rate hikes, or the low expected inflation over the next few years, has to give. Currently pricing is not consistent. Something has to give.
The BEI spread SGBi3107 is trading close to lows and implies record-low CPIF inflation over the next few years. Amid the signs that the BEI rate has met resistance at the current low BEI rate, we see a good opportunity to buy the bond. We expect the auction to be well received.
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We continue to regard the current pricing as inconsistent as we expect a super-low CPIF (CPI excluding interest rates) over the next few years and, at the same time, we expect the Riksbank to lift the repo rate. Either the market is pricing hikes too soon or it is expecting inflation to be too subdued over the next few years. The market is pricing hikes equal to 125bp over the next four years despite expecting inflation to be very low. Indeed, we expect CPIF to be the lowest ever recorded over the next four years. Over a four-year period, CPIF has not been below 1.25%, whereas the market is pricing average inflation over the next four years of 0.9%. The Riksbank is not committed to forward guidance but we think repo rate hikes are conditional on inflation moving considerably higher from here, close to the inflation rate target. The central bank has come in for heavy criticism over the past year or so for not being able to reach the inflation target for several years, thus the Riksbank will not hike unless inflation is moving significantly higher. Hence, either the pricing of rate hikes, or the low expected inflation over the next few years, has to give. Currently pricing is not consistent. Something has to give.
The BEI spread SGBi3107 is trading close to lows and implies record-low CPIF inflation over the next few years. Amid the signs that the BEI rate has met resistance at the current low BEI rate, we see a good opportunity to buy the bond. We expect the auction to be well received.
To Read the Entire Report Please Click on the pdf File Below.