Auction preview 12may

Marketing Communication

EGB Auction Preview Reopening DSL July 2025

Group Economics Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com

DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.

11 May 2015        

Tomorrow, the DSTA will reopen for the first time its 10y benchmark for EUR 2 – 3bn Execution risk has increased because of recent volatile swings and illiquid market conditions This could mean that the DSTA will take a cautious price strategy in the upcoming sale Overbidding could be limited and the amount raised could end up at the lower end of the target amount The recent selloff has made 10y eurozone government bonds more attractive… … and we cautiously fade the move The 10y benchmark has cheapened in a spread vs Bunds but also in ASW and on its own curve We prefer to exploit the 10y cheapness by setting up a Dutch 5s10s30s fly

First reopening of 10y benchmark after launch in March

Auction details

Tomorrow, the Dutch Treasury will reopen its 10y benchmark, DSL July 2025, for the first time. The bond was introduced via a Dutch Direct Auction (DDA) in March of this year. The 10y benchmark will be reopened after tomorrow’s sale a number of times so that the outstanding amount will be at least EUR 15bn by the end of 2015. For tomorrow’s sale, the DSTA has already announced that it will target EUR 2.0 - 3.0bn. This means that including the upcoming transaction, the DSTA will still need to issue around EUR 6bn of this 10y benchmark until

Auction Date

Tuesday 12 May

Timing

10:00 AM CET

Target Amount

EUR 2.0 – 3.0bn

Settlement

14 May 2015

Source: DSTA

Bond characteristics

November (the DSTA will unlikely use its reserve auction in December) of this year.

Market jitters lead possibly to low overbidding Since volatility in the market has increased and the market

Coupon

0.25%

Maturity

15 July 2025

Outstanding

EUR 6.708

ISIN

NL0011220108

remains jittery after recent market movements and rather illiquid, we would not be surprised if tomorrow’s sale will be

Source: DSTA

executed in a short time frame. Unlike other issuance techniques used by eurozone treasuries, the DSTA itself sets

Capital market funding will improve to 48% of yearly target

the price at which Primary Dealers can purchase the bond. As

Up to now, the DSTA has issued almost EUR 21bn on the

a result, the DSTA can try to steer the duration of the auction

capital markets. The target for 2015 is EUR 48bn, which

by setting an attractive price. We expect that the DSTA will

means that the DSTA has raised almost 44% of its yearly

take a cautious stance and that it will not try to sell the bond

target. As indicated before, we would not be surprised if the

too expensive. This means that the overbidding premium could

amount raised in tomorrow’s sale will be close to the lower end

be limited. This also means that the amount raised could,

of the announced target size. This would increase the total

depending on the auction price and market demand, be at the

amount outstanding of the bond close to EUR 9bn. The year to

lower end of the announced target size.

date capital market funding will subsequently improve to around 48%. Furthermore, we estimate that more than 60% of the yearly target will be reached by the end of Q2.

Insights.abnamro.nl/en

Bloomberg: ABNM

2

Euro Rates Weekly - Reopening DSL July 2025 - 11 May 2015

Relative value considerations

Dutch 5s10s at steepest level in 2015

The recent selloff in eurozone bond markets has hit 10y

In bps

eurozone government bonds and also 10y DSLs hard. The DSL July 2025 was launched at +16.5bps over the German

80

DBR February 2025 in March of this year. Currently the 10y Dutch benchmark is trading above this spread, at almost

60

18bps. This is an attractive level to fade the recent move.

Also in ASW terms as on its own curve, the Dutch 10y bond

40

has cheapened in the run up to tomorrow’s transaction (see graphs below for spread vs Bunds, ASW underperformance and 5s10s steepening).

20 Nov-14

Dec-14

Jan-15

Feb-15 Mar-15

Apr-15

Dutch 10y is trading above initial launch vs Bunds In bps

Source: ABN AMRO Group Economics, Bloomberg

20

Preferred way to exploit 10y cheapness through fly The previous graphs indicate that 10y DSLs offers attractive

18

value. Our preferred way, taking into account risks and current 16

market conditions, would be to set up a 5s10s30s fly (buy DSL July 2025, sell DSL January 2047 and sell DSL January 2020).

14

This fly is currently trading at around 10bps (see graph below).

We suggest to short the DSL January 2047 as the DSTA will

12

also need to tap this bond in the remainder of the year.

10 Mar-15

Apr-15

Apr-15

May-15

One element worth considering of this trade is that national central banks could buy shorter maturing bonds as the pool of

Source: ABN AMRO Group Economics, Bloomberg

eligible bonds has increased on the back of the recent selloff.

ASW underperformance of Dutch 10y benchmark In bps

Historical purchasing data provided by the ECB shows that the Dutch central bank has bought on average the lowest remaining maturing bonds of all core central banks (around 7y). This is one of the reasons why we expect that 2s5s could

-10

perform in core bond markets (see here for our Euro rates weekly: Bund blowout halted). This could hamper the

-15

attractiveness of our proposed fly. One could change the shorter leg by a 2y bond, but this would increase the curve risk -20

-25 Mar-15

of the trade. We therefore still prefer the 5s10s30s fly.

5s10s30s fly looks attractive Apr-15

Apr-15

May-15

In bps

15 Source: ABN AMRO Group Economics, Bloomberg

10 5 0 -5

-10 Mar-15

Apr-15

Source: ABN AMRO Group Economics, Bloomberg

3

Euro Rates Weekly - Reopening DSL July 2025 - 11 May 2015

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