Marketing Communication
EGB Rates Watch Reopening DSL 2018 – Penultimate sale
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.
21 September 2015
Tomorrow, the DSTA will hold a penultimate sale of its 3y benchmark, the DSL April 2018 The announced target size is EUR 2.5 – 3.5bn, we expect EUR 3bn to be issued The Dutch Q4 funding update showed small changes to this year’s borrowing plan… …but a possible IPO of ABN AMRO could decrease issuance of Tbills by around EUR 4bn This could create scarcity in short-end DSLs, which the 3y tenor could also benefit from The 3y benchmark shows good value on its curve, especially in a spread vs money market yield… … and we like setting up a box trade vs the DSL April 2017 and their German comparables
Reopening DSL 2018: Penultimate sale
Bond characteristics
The Dutch Treasury will auction its 3y benchmark, the DSL 0% April 2018, for EUR 2.5 – 3.5bn tomorrow. The sale will be the
Coupon
0%
penultimate auction of the Dutch 3y benchmark. The final sale
Maturity
15 April 2018
will take place in November of this year.
Outstanding
EUR 9.633bn
ISIN
NL0011005137
Currently, the outstanding amount of the bond stands at EUR 9.633bn. The DSTA’s policy dictates to increase the outstanding amounts of its benchmark bonds to above EUR 15bn. This means that in the next two auctions a combined total of EUR 5.5bn will need to be raised. The recently released Q4 funding plan, which is discussed later in this note, already included details of the final reopening. In this update, the DSTA stated that the final reopening will have a target size of EUR 2 – 3bn. This means that the DSTA will likely target the middle range of the target range in tomorrow’s auction, which is EUR 3bn.
Source: DSTA
Q4 update leads to small changes in funding plan… Two opposite forces are described in the Q4 funding update. On one hand, buy- backs, which have been executed by the DSTA, have increased the borrowing requirement. On the other hand, the government’s cash budget deficit turned out slightly lower than expected. As a result, the 2015 borrowing requirement has deteriorated by EUR 500mn to EUR 94.9bn. As always, the small increase will be absorbed by a slightly higher issuance of Dutch Tbills. The foreseen amount raised on the capital markets remained unchanged at EUR 48bn.
Auction details
… but sale of ABN AMRO could create scarcity of Tbills Auction Date
Tuesday 22 September
Timing
10:00 AM CET
requirement does not include any receipts resulting from a
Target Amount
EUR 2.5 – 3.5bn
possible IPO of ABN AMRO later this year. If the IPO would
Settlement
24 September 2015
see the light of day in Q4, the cash balance would improve
However, the 2015 estimate for the cash deficit and borrowing
significantly. If so, the DSTA would need to change its funding
Source: DSTA
plan accordingly, by decreasing the issuance of money market instruments. Most notably the issuance of Tbills would suffer. However, no details are disclosed on the timing and size of a possible sale. What is known, is that according to the official
Insights.abnamro.nl/en
Bloomberg: ABNM
2
Euro Rates Weekly - Reopening DSL 2018 – Penultimate sale - 21 September 2015
Budget Memorandum, the Dutch government is working with
On its domestic curve, the DSL April 2018 shows good value
base line assumptions of selling a 25% stake in 2015 and a
though. Bonds with a maturity shorter than 2018 are trading
20% stake in 2016. In addition, the Dutch Minister of Finance,
expensive, possibly influenced by the buy-back programme of
Mr Dijsselbloem, said earlier this year to national Parliament
the DSTA. As depicted in a spread vs the equivalent
that a possible 2015 sale could range between 25% to 30%.
interpolated money market yield, the DSL April 2018 is showing good relative value vs its shorter counterparts.
Taking this into account and using the government’s estimate of ABN AMRO’s book value of EUR 15bn (taken from the
The 3y benchmark is cheap vs money market yield
Budget Memorandum), proceeds of possibly EUR 4bn is on
Bond yield – interpolated money market yield, for short dated DSLs
the cards. This means that the issuance of money market instruments could fall by maximum EUR 4bn. A decline of EUR
4
4bn equates to a decrease of almost 9% of money market
0
issuance. An increase of scarcity of Dutch money market
-4
securities, could also mean that short term bonds attract more -8
demand.
July 22
July 21
July 20
Jan 20
Jan 19
July 19
July 18
April 18
Jan 18
July 7
Year to date, the DSTA has raised 76% of its target for bond
April 17
Capital market issuance will rise to 83% of target
Jan 17
Jul 16
-12
Money market spread
issuance, which is fixed at EUR 48bn. Incorporating our envisaged target amount for tomorrow’s auction, we estimate that the year-to-date bond issuance will increase to 83% of the
Source: Bloomberg
target. The cheapness of the DSL April 2018 and the tight pricing of The DSTA has recently announced its funding calendar for Q4,
other shorter-dated DSLs can also be shown when comparing
during which the DSTA will need to raise around EUR 8.5bn to
to Bunds. The yield spread between the DSL April 2018 and
reach the fixed target amount of EUR 48bn.
DSL April 2017 (which lies outside the universe of eligible ECB bonds and which is trading already at -23bps) stands at almost
The Q4 funding calendar contains the following four remaining
10bps. The same spread, depicted as the difference between
bond auctions:
the OBL April 2018 and OBL April 2017 is trading below 3bps.
Two auctions of the 10y benchmark, the DSL July
As such, the Dutch spread is showing very good value. Hence,
2025, for EUR 1.0-2.0 bn each
our preferred way of exploiting the value of the Dutch 3y
Off-the-run auction, for EUR 1.5 – 2.5bn
benchmark is to set up a box trade between these securities.
Final reopening of the 3y benchmark, the DSL April
This is shown below.
2018, for EUR 2.0 - 3.0bn
3y DSL is cheap in a box vs German bonds See for official publication: http://www.dsta.nl/english/News/Press_releases/2015_Q3/Qua rterly_outlook_and_issuance_calendar_fourth_quarter_2015 Relative value considerations
bps
8
4
The current 3y benchmark, the DSL April 2018, was issued in January of this year at a yield of -2bps. Since then, the outright
0
yield has moved quite aggressively to near the negative ECB deposit rate of -20bps. After having reached -18bps in April, the bond widened as outright yields surged. The bond is now
-4 Jan-15
trading at around -14bps. From an outright yield perspective,
May-15
Jul-15
Box DSL- OBL 2018 vs 2017
the Dutch 3y offers limited value, despite our base case scenario of QE Plus before the end of the year.
Mar-15
Source: Bloomberg
Sep-15
3
Euro Rates Weekly - Reopening DSL 2018 – Penultimate sale - 21 September 2015
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