On Thursday 13 and Friday 14 November, the SNDO will offer switch auctions, buying back a total of SEK14.4bn in SGB1052 (March 2019) and selling SEK10bn of SGB1047 (December 2020). The switches are meant to support the coming change of underlying benchmark loan in 5Y futures, which will occur at the December futures roll. What is noteworthy is that both loans are already comparatively large at SEK93bn and SEK72bn.
Despite SGB1052 being a large loan, it trades very dear already in the repo market, some 20-25bp below the Riksbank's repo rate. The upcoming futures roll could put further pressure on the loan. SGB1047 trades somewhat cheaper in the repo market and more issuance in that loan in regular auctions can be expected.
It is important to note that the yield curve is rather steep between SGB1052 and SGB1047 (Chart 1) - the forward rate between the two loans is 1.54%, a clear incentive for real money investors to participate in the auctions. However, we still see a risk that the exchange auctions will attract relatively little interest, one reason being that the switches are risk neutral and the bonds only differ by 18 months in maturity. The switches are offered to support the market and thus the Debt Office will probably not do the switches if the pricing is unfavourable. Real-money investors (index trackers) could adopt a 'wait-and-see' approach without taking a big bet. Moreover, investors might not be keen to unload a bond that is in high demand in the repo market.
To Read the Entire Report Please Click on the pdf File Below