Last auction before the summer break: the last chance to pick up a sizeable amount of long-dated linkers.
There are some tentative signs of inflation in the US. If this is the case, it could very well affect longer European/Swedish bond yields and BEI rates (10Y). It also supports our 5s10s steepener in nominal rates space.
On Thursday, the debt office will be offering SEK1,000m in SGBi3108. This will be the last linker auction before the summer break, meaning no supply until around end August/early September. As the tactical timing is appealing, we expect the auction to go well.
Excluding the panic levels of 2008-09, Swedish 10Y BEI spreads are trading close to lows. There are, however, signs that BEI spreads are bottoming out. During the latest move down in rates, the long dated have performed better than previously. The beta coefficient has been higher in the recent decline in interest rates – signs of BEI rates bottoming out and offering a good risk/reward (see Charts 1 and 2).
We see BEI spreads as an attractive and cautious way of positioning for higher long-dated bond yields. The significant measures the ECB has announced could help lift inflation expectations in Europe. We like to draw a parallel with when the Fed introduced QE3. In the two months prior to when the measure was announced, US 10Y BEI spreads rose by almost 50bp, despite nominal rates moving lower.
Also, we saw some signs of modest inflation pressure starting to build up in the US, with core PCE moving from 1.1% to 1.4% in the past three months (see Chart 3). If that tendency continues it could inject some more optimism into long-term European and Swedish BEI spreads even though European and Swedish inflation rates are likely to be stuck at low levels for a significant amount of time.
Here, our view remains broadly unchanged. Swedish and euro inflation tend to move in tandem, with the residual to a large extent explained by the SEK (Chart 4). The threat of higher inflation short term comes mostly from higher food and energy prices. Even though the output gap is much smaller in Sweden, there are few signs of wage pressure building up.
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