There will be another tap auction of SGBi3109 (June 2025) on 28 August. We recommend buying the bond in the auction, as we continue to recommend real rate flatteners. Despite the recent performance, we think there is room for more flattening. We prefer to sell the 3Y bond SGBi3107 against the SGBi3109. Break-even inflation rates have taken a beating over the past week but it has not been close to what we have seen in Europe this month. The betas, linkers to nominal bond yields, have been relatively high. Hence, real rates have moved much lower in a bull flattener.
So, we expect the general flattening trend to continue. On top of this, we expect inflation to remain subdued, the repricing of European BEI/real rates to weigh on the short end in Sweden and the carry period up to November to benefit flatteners along the real rate curve (positive carry in flatteners). So, hold on or add to real rate flatteners.
We have also argued for selling front-end Swedish linkers (June 2017, SGBi3107) against OBLi 2018. This real rate spread has moved nearly 15bp this week following Draghi’s comments about European BEI rates (inflation expectations). Following the quick move, we prefer to cut risk exposure even though we think the spread could move a bit more.
Swedish inflation development over the past couple of months has been a bit erratic, involving extra uncertainty and volatility from a small number of price components. For example, airline tickets and prices on charter packages have shown significant price swings, probably weather related. However, at the same time, there is an intense ‘price war’ in the background, with Stockholm Arlanda taking the crown from Copenhagen as the cheapest airport for international destinations. Hence, we expect some downward pressure here, specifically in August but which may very well be present for an extended period. Clothing is uncertain too. Price reductions in the July sales were smaller than expected and the seasonal pattern in August and September is uncertain, as the historically strong pattern was broken last year. Car fuel prices and mortgage rate components also had unexpected price developments last month, which may lead to a compensating rebound this month. Nevertheless, our CPI forecast suggests that CPI inflation will move higher throughout the autumn, from negative to around 1% by year-end. This said, long-term fundamentals such as nominal wage growth or labour costs suggest inflation is likely to flatten out just above that level.
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