Sell SGBi3109 and buy DBRi 2026 in a real rate spread @ -33.5bp. P/L: -10bp/-50bp
Swedish real rates have performed on the back of the higher Swedish inflation rate relative to Europe since December 2015 when the inflation rate spread was -0.15% – now it stands at +0.8%. According to our forecasts on Swedish and European inflation (on linkers’ base index) the inflation spread will be back in the negative by the start of next year, -0.4% in February. Clearly, in our view, this change in relative inflation is not priced in the markets today, either in nominal rate spreads (SWE-GER) up to the 5y segment or in real rate spreads. With the very steep Swedish yield curve we prefer to be long Swedish nominal rates vs.
European peers in the 2y to 5y segment, but to balance it by being short at the longer end of the real rate spread, i.e. a sort of break-even inflation box. Hence, we prefer to do the spread in linkers in the 10y segment. By doing this we avoid the volatility in shorter real spreads due to isolated CPI data releases and carry periods. Evidently, longer real rate spreads move with the relative inflation rate so we still take a position for slower inflation in Sweden relative to Europe.
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