Government Bonds Weekly, 9-16 December 2016 - We go long the Bund spread Arne Lohmann Rasmussen Jens Peter Sørensen Anders Møller Lumholtz Chief Analyst, Fixed Income Research Chief Analyst, Fixed Income Research Chief Analyst, Fixed Income Research arr@danskebank.dk jenssr@danskebank.dk andjrg@danskebank.dk +45 45 12 85 32 +45 45 12 85 17 +45 45 14 69 98 9 December 2016 Investment Research www.danskebank.com/ci Important disclosures and certifications are contained from page 15 of this report
Market views after ECB more curve steepening and wider Bund spread Rather than repeat what the ECB did yesterday, we refer you to our ECB review here. Instead, we outline our view on the EGB market following the ECB meeting. Tapering theme not dead: Although Mario Draghi tried his best to convince the market the move from EUR80bn to EUR60bn a month should not be seen as tapering, we believe this theme will resurface throughout 2017, adding to the steepening of the yield curve. Lower QE purchases at the long end also add to steepening 10Y30Y. Bund asset swap set to widen: Although buying below the depo rate will take place only if necessary and more longer dated bunds are approaching the ISIN limit, we doubt the Bundesbank will have any choice but to do so. This widens the pressure on the asset swap curve. We go long the Bund spread (see page 3). Ineffective changes to the securities lending programme: The EUR50bn in additional collateral (cash) should in isolation ease the repo squeeze for Bunds. However, the current -70bp is not a floor but rather the cheapest level at which it will be activated. Over year-end in particular, the new tool might have little impact as cash will add to banks balances adding to the resolution fund bill. This is not the case when bonds are used as collateral. We doubt the new measure will ease tightness in the German repo market significantly. Little help to periphery: The unchanged issue/issuer limit and unchanged capital key mean that Portugal and Ireland in particular will see no extra help from continued PSPP buying in 2017 and possibly 2018. Furthermore, Italy is vulnerable due to the political situation and recent rating concerns since Moody s changed its outlook. In our view, the ECB offered little help to Italy. We enter Q1 with a cautions stance on the periphery. We look for a wider Bund spread Source: Bloomberg, Danske Bank Markets We doubt the repo squeeze will disappear Source: Danske Bank Markets 2
Buy the Bund spread@38.5bp or DBR 0% 08/26 vs swaps@39bp We do not expect the change in the repo to have a significant impact on solving the squeeze in the Bund spread. There were big moves in the Bund, Bobl and Schatz when we rolled into the March future as seen in the chart, so optically the spread looks cheap. If we look at the underlying bonds, the move is somewhat more modest. Looking at the underlying bonds, there is a solid carry being long DBR 0% 02/26 relative to swap it rolls some 9bp up the ASW-spread curve. Furthermore, there is a bit of seasonality in ASW spreads, with the Bund/Bobl/Schatz spread widening in January. We buy the Bund spread@38.5bp or DBR 0% 08/26 vs swaps@39bp. 90 80 Schatz Bobl Schazt spread 70 60 50 40 30 20 10 0 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Source: Bloomberg, Danske Bank Markets The 5Y and 10Y ASW-spread - Germany bp 60 50 40 30 20 10 DBR 1 15AUG2025 DBR 0 09APR2021 DBR 0 15AUG2026 0 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Source: Bloomberg, Danske Bank Markets 3
Publication schedule for supply outlooks 2017 Scheduled/already published Belgium released its outlook on 6 December http://www.debtagency.be/pdf/borrowingrequirements2017.pdf Portugal published its on 21 October http://bit.ly/2hss5x4 Austria 14 December http://www.oebfa.at/en/pages/default.aspx Netherlands 15 December https://english.dsta.nl/ France on 15 December http://www.aft.gouv.fr/ Finland 23 December http://www.treasuryfinland.fi/en-us/quarterly_review(57289) Expected release day Germany 15-30 December http://www.deutsche-finanzagentur.de/en/institutional-investors/ Spain late December/early January http://www.tesoro.es/en/deuda-publica Italy late December http://www.dt.tesoro.it/en/debito_pubblico/ Ireland 19-23 December http://www.ntma.ie/news/ Scandi Denmark 14-20 December http://www.nationalbanken.dk Sweden already published https://www.riksgalden.se/en Norway 20 December http://norges-bank.no 4
Supply outlook estimates for 2017 modestly higher gross issuance relative to 2016 but significantly lower net issuance Redemptions (EUR bn) Deficit % of GDP* Bond issuance ** Net Issuance 2016 2017 2016 2017 2016 2017 2016 2017 Germany 147 142-0.4% 0.0% 160 140 13-2 France 95 117-3.4% -3.1% 210 210 115 93 Italy 155 210-2.5% -2.3% 225 250 70 40 Spain 45 84-4.5% -3.1% 116 115 71 31 Belgium 28 28-2.7% -1.6% 37 35 9 7 Austria 8 18-1.6% -1.2% 22 20 14 2 Netherlands 28 43-1.5% -0.5% 32 45 4 2 Finland 6 11-2.5% -2.6% 11 16 5 5 Ireland 5 6-1.1% -0.4% 8 7 3 1 Portugal 9 7-2.9% -1.6% 18 16 9 9 Greece 28 8-3.4% -2.3% 0 0-28 -8 Total 555 675 839 854 284 179 Denmark 56 53-0.6% -2.5% 63 65 7 12 Sweden 53 80-0.5% -0.4% 110 80 57 0 Norway 0 51 5.5% 5.7% 55 50 55-1 * Danske Bank and National Debt offices and Ministry of Finance ** This is expected bond issuance excluding T-bills and prefunding; France issues some EUR210-220bn, with the excess to buy at the front end of the *Danske Bank and National Debt offices and Ministry of Finance curve; a similar thing happens in Italy and Denmark Source: ** This is National expected debt bond offices, issuance Ministry excluding of Finance, T-bills Danske and prefunding. Bank France issues some 210-220bn where the excess is to buy in the front end of the curve. A similar thing happens in Italy and Denmark 5
The calendar next week: look out for 2017 funding and issuance outlooks Supply: This is the last week in 2016 with supply in the EGB market. We have Austria tapping for the last time in the 10Y segment. Year to date it has issued bonds for EUR21.8 bn and the funding target is EUR22.0bn; hence, slightly prefunding this year in Austria. Spain will tap in the 5Y and 10Y segment. Funding and issuance outlook 2017: Next week, a number of 2017 funding and issuance outlooks are scheduled to be published. Austria, the Netherlands and France are already in the calendar and Ireland might also publish its Q1 outlook next week. The Danish Debt office might publish its 2017 outlook late in the week. See also page 3. Rating review: Germany is up for review by S&P. week 50 issuer type maturity coupon size Tuesday 13/12 Austria RAGB Oct-2026 0.8% EUR 1.1bn Austria RAGB Oct-2025 1.2% Italy BTPS cancelled Wednesday 14/12 Sweden SGB Dec-2020 5.0% SEK 1bn Sweden SGB Nov-2026 1.0% SEK 2bn Austria 2017 Funding outlook and auction calendar Thursday 15/12 Spain SPGB Jul-2021 0.8% EUR 3-4bn Spain SPGB Oct-2026 1.3% Netherlands 2017 Funding outlook France 2017 Funding outlook Source: Danske Bank Markets 6
Net cash flow positive net cash flow dues to Germany and Italy Net cash flow Week 50 Week 51 Week 52 Germany 14.0 0.0 0.0 France 0.0 0.0 0.0 Italy 16.1 0.1-8.0 Spain -3.5 0.0 0.0 Portugal 0.0 0.0 0.0 Belgium 0.0 0.0 0.0 Netherlands 0.0 0.0 0.0 Austria -1.1 0.0 0.0 Finland 0.0 0.0 0.0 Ireland 0.0 0.2 0.0 Slovakia 0.0 0.0 0.0 Greece 0.0 0.0 0.0 EFSF 0.0 0.0 0.0 ESM 0.0 0.0 0.0 Total - EUR 25.5 0.4-8.0 Denmark 0.0 0.0 0.0 Sweden -3.0 0.0 0.0 Norway 0.0 0.0 0.0 Note: All volumes are in billions, local currency. Note: All volumes are in billion in local currency Negative means more issuance than coupons and redemptions Source: Danske Bank Markets Note: Negative means more issuance than coupon and redemption 7
Last week s auctions quiet week week 49 issuer type maturity coupon sold b-t-c avg. Yield Wednesday 07/12 Germany Schatz Dec-2018 0.0% 2,634 1.8-0.71% Norway NGB May-2023 2.0% 3,000 1.8 1.52% Denmark DGB Nov-2018 0.3% 150 3.7-0.59% Denmark DGB Nov-2025 1.8% 2,510 1.2 0.43% Thursday 08/12 Sweden SGBi Jun-2019 0.1% 500 2.9-2.10% Sweden SGBi Jun-2032 0.1% 250 3.3-0.54% Source: Bloomberg, Danske Bank Markets 8
Supply YTD and remaining net supply Expected gross bond issuance 2016 Gross Bonds Expected net % issued YtD of expected gross Expected issuance Net issuance issuance maturing issuance Official (Bn) Official estimate* Danske Markets 2016 YtD Danske Markets 2016 YtD 2016 2016 estimate Germany 164.0 164.0 159.5 14.0 5.0 150.0 97% 97% France 220.0 220.0 210.0 0.0 44.3 220.0 95% 95% Italy 230.0 230.0 223.7 15.6 63.6 214.4 97% 97% Spain 115.3 115.3 116.2 0.0 30.6 115.3 101% 101% Portugal 18.4 18.4 17.3 0.0 10.8 18.4 94% 94% Greece 5.0 5.0 0.0 0.0-35.6 5.0 0% 0% Belgium 36.5 36.5 37.6 0.0 12.1 36.5 103% 103% Netherlands 35.0 35.0 32.2 0.0 4.2 35.0 92% 92% Austria 22.0 22.0 21.8 0.0 10.2 22.0 99% 99% Finland 11.0 11.0 11.5 0.0 5.0 11.0 105% 105% Ireland 8.0 8.0 9.7 0.0 1.5 8.0 121% 121% EU 6.1 6.1 4.8 0.0-1.5 6.1 78% 78% EFSF 14.0 14.0 14.0 0.0 0.5 14.0 100% 100% ESM 28.0 28.0 21.4 0.0 21.4 28.0 77% 77% Total - EUR 913.3 913.3 879.7 29.6 172.1 883.7 96% 96% Denmark* 65.0 65.0 61.7 0.0 6.0 65.0 95% 95% Sweden 97.0 97.0 109.3 0.0 56.0 97.0 113% 113% Norway 55.0 55.0 52.0 0.0 52.0 55.0 95% 95% **Denmark numbers are are notional notional levels, levels i.e. not i.e. not taking taking into into account account the the additional additional revenue revenue from from the sale sale of of bonds trading above above 100 100. Source: EU debt agencies, Danske Bank Markets 9
Trades We currently have no open trades except the trades found in Danske Bank Markets Fixed Income Top Trades 2017, 1 December. See our Fixed Income Top Trades 2017 here. Fixed Income Top Trades 2017 overview #1: 10Y-30Y 5Y fwd EUR swap steepener #2: Lower 1y1y real rate (rec 1y1y eonia vs higher 1y1y inflation) #3: Steeper EUR swap curve 3Y10Y 6M fwd #4: Long France versus swaps/the Netherlands #5: Long only recommendations Danish covered bonds #6: Relative value trade DK mortgages - Buy 2.5 47 against 10Y EUR swaps #7: Relative value trade DK mortgages - Buy 1.5 37 against 10Y EUR swaps #8: Exploit steep money market curve and receive SEK 3Y1Y #9: Receive 1Y1Y EURSEK CCS #10: Long 6y NGB vs. Germany with an open FX exposure Source: Danske Bank Markets 10
Germany Standard & Poor s Standard & Poor s: 16 December Germany Moody's S&P Fitch Rating Aaa AAA AAA Outlook Stable Stable Stable Potential rating decision 2017 16 December 2016 2017 Requirement for downgrade Downward pressure on Germany's Aaa rating could occur if we were to observe a prolonged deterioration in the government's fiscal position and/or the economy's long-term strength. We could lower our ratings on Germany if we observed a significantly weaker trend growth than we currently expect, translating into a marked deterioration in public finances, or if we perceived a weakening in the ECB's monetary flexibility. In addition, an unexpected surge in contingent liabilities, particularly from the banking sector, or contagion from a potentially re-intensifying eurozone crisis, could put pressure on the ratings if required sovereign support was significantly larger than we anticipate. However, we currently do not expect these scenarios to materialize over our outlook horizon. -A reversal of the declining trend in the general government debt ratio. Debt approaching 90% of GDP would start to put pressure on the rating. -Crystallisation of contingent liabilities, for example further state support to the banking sector or to other eurozone countries. As a member of the currency union, Germany is financially exposed to a re-intensification of the eurozone crisis. Source: Fitch, Standard & Poor s, Moody s 11
Germany Standard & Poor s Standard & Poor s: 16 December Source: Fitch, Standard & Poor s, Moody s Source: European Commission 12
Current rating and outlook Fitch Moody's S&P DBRS Germany AAA Aaa AAAu AAA Finland AA+ Aa1 AA+ AAH Netherlands AAA Aaa AAAu AAA Austria AA+ Aa1 AA+ AAA Belgium AA Aa3 AAu AAH France AA Aa2 AAu AAA Ireland A A3 A+ AH Italy BBB+ Baa2 BBB-u AL *- Spain BBB+ Baa2 BBB+ AL Portugal BB+ Ba1 BB+u BBBL UK AA Aa1 AAu AAA Denmark AAA Aaa AAA AAA Sweden AAA Aaa AAAu AAA Norway AAA Aaa AAA AAA Slovenia A- Baa3 A --- Cyprus BB- B1 BB B Greece CCC Caa3 B- CCCH EFSF AA Aa1 AA WR ESM AAA Aa1 --- --- EU AAA Aaa --- --- Source: Moody s, Fitch, Standard & Poor s, DBRS Fitch Moody's S&P DBRS Germany STABLE STABLE STABLE STABLE Finland STABLE STABLE STABLE STABLE Netherlands STABLE STABLE STABLE STABLE Austria STABLE STABLE STABLE STABLE Belgium NEG STABLE STABLE STABLE France STABLE STABLE STABLE STABLE Ireland STABLE POS STABLE STABLE Italy NEG NEG STABLE --- Spain STABLE STABLE STABLE STABLE Portugal STABLE STABLE STABLE STABLE UK NEG NEG NEG STABLE Denmark STABLE STABLE STABLE STABLE Sweden STABLE STABLE STABLE STABLE Norway STABLE STABLE STABLE STABLE Slovenia STABLE POS STABLE --- Cyprus POS POS POS POS Greece --- STABLE STABLE STABLE EFSF STABLE STABLE STABLE STABLE ESM STABLE STABLE --- STABLE EU STABLE STABLE STABLE STABLE 13
Rating calendar for 2016 Moody's Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 26 24 21 France 22 20 16 Italy 12 10 7 Spain 19 17 14 Portugal 15 6 2 Greece 26 24 14 Belgium 4 24 4 Netherlands 4 8 28 Austria 26 24 21 Finland 5 3 28 Ireland 22 13 16 Denmark 25 22 18 Sweden 8 5 2 Norway Not scheduled S&P Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 8 8 16 France 22 21 Italy 13 11 Spain 1 30 Portugal 18 16 Greece 22 22 Belgium 15 15 Netherlands 20 21 Austria 18 16 Finland 18 16 Ireland 3 2 Denmark 18 16 Sweden 4 2 Norway 22 21 Fitch Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 8 1 23 France 10 9 Italy 22 21 Spain 29 29 Portugal 4 19 Greece 11 2 Belgium 22 1 23 Netherlands 6 4 Austria 5 5 Finland 11 2 Ireland 5 15 Denmark 12 29 Sweden 18 26 Norway 15 7 Source: Moody s, Fitch, Standard & Poor s, DBRS DBRS Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Germany 29 29 France 29 28 Italy 18 16 Spain 8 7 Portugal 29 21 Greece 10 9 Belgium 4 Netherlands 26 19 Austria 13 11 Finland 11 9 Ireland 11 2 Denmark 15 15 Sweden 3 2 Norway 13 11 14
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