Fixed Income Strategy

Fixed Income Strategy

8 May, 2024 Pär Magnusson, +46 (8)700 92 68, par.magnusson@swedbank.se

*This report has been prepared by sales and trading – non-independent research – only for professional clients*

*The views expressed here are the desk strategists’ only and do not constitute an official view from Swedbank*

Strategy Briefing
In brief
• The Riksbank cut by 25bp as expected in a unanimous decision. Since this was a meeting
where forecasts weren’t updated, two more rate cuts this year remains the Riksbank’s outlook.
• Seeing as the Riksbank opted to cut in the middle of the quarter, it appears as if this will be the
pattern going forward rather than cuts by quarter ends. This reduces the average repo funding
cost over the next year or so, which makes 1y Swedish covered bonds attractive to buy outright.
• Any long positions in e.g. 1y covered bonds ought to be hedged, though. Either by buying short
maturity SGBi BEI rates, or by paying 6m1y SEK forward IRS.

No Reservations
As expected, the Riksbank delivered a 25bp rate cut by a unanimous monetary policy committee.
Seeing as this meeting did not produce any new forecasts, the policy rate path from March dictating
one 25bp rate cut each quarter for the remainder of this year still stands.

The policy statement was quite even handed in my opinion. It dutifully noted that there are upside risks
to inflation stemming from a weaker SEK, higher US inflation and geopolitical upheaval, but also that
core inflation after the low March reading now is set on a favourable path.

The immediate market reaction this morning is a further depreciation of the SEK, which obviously
makes the upcoming inflation data for April due out next week all the more important. Should Swedish
inflation surprise on the upside in a manner that pushes the inflation path higher (not our forecast), the
Riksbank will find itself in an uncomfortable position.

What did change after this meeting was that it now appears as if the Riksbank has decided on a pattern
where it cuts in the middle of each quarter rather than by the end of each quarter. This implies a
parallell shift that does reduce the average repo funding cost over the next year or so, which in turn
makes short maturity bonds more attractive to buy.
Completed: May 8, 2024, 10:55 Please see important disclosures at the end of this document Disseminated: May 8, 2024, 10:55
Fixed Income Strategy
The case to buy e.g. the 13 months Swedbank 195 covered bond, currently trading around 3.52%, just
became a bit stronger. The carry until maturity will be positive if the Riksbank delivers two more 25bp
cuts by the end of this year.

However, I maintain my long held case that buying short maturity SGBi BEI is an attractive hedge
against received SEK rates positions. Should we see reduced rate cutting expectations it would likely
occur in a situation where inflation surprises on the upside (perhaps as a result of geopolitically driven
shocks). The SGBi3112 BEI rate is currently around 1.3%.

Long positions in 1y Swedish covered bonds can also be favourably hedged by paying 6m1y SEK
forward IRS, as the roll in the latter is very high. As this is written the roll-up is 6bp per month. The
combination of a bought position in Swedbank 195 and a paid 6m1y SEK forward IRS has the benefit
of being a hedged position that brings good of running returns.

Swedbank Fixed Income Sales Contacts – Bloomberg SWEB

Marcus Cederberg, +46 (8)700 91 39, marcus.cederberg@swedbank.se
Olle Ringström, +46 (8)700 99 78, olle.ringstrom@swedbank.se
Camilla Nesvik, +46 (8) 700 95 26, camilla.nesvik@swedbank.se
Hanna Andersson, +46 (8) 700 98 17, hanna.c.andersson@swedbank.se
Mats Hydén, +46 (8) 700 98 05, mats.hyden@swedbank.se
Martin Kellgren, +46 (8) 700 98 04, martin.sven.einar.kellgren@swedbank.se
Fixed Income Strategy
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