Euro rates watch dsl april 2018 penultimate sale

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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


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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


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Euro Rates Weekly - Reopening DSL 2018 – Penultimate sale - 21 September 2015

DISCLAIMER ABN AMRO Bank Gustav Mahlerlaan 10 (visiting address) P.O. Box 283 1000 EA Amsterdam The Netherlands This material has been generated and produced by a Fixed Income Strategist (“Strategists”). Strategists prepare and produce trade commentary, trade ideas, and other analysis to support the Fixed Income sales and trading desks. The information in these reports has been obtained or derived from public available sources; ABN AMRO Bank NV makes no representations as to its accuracy or completeness. The analysis of the Strategists is subject to change and subsequent analysis may be inconsistent with information previously provided to you. Strategists are not part of any department conducting ‘Investment Research’ and do not have a direct reporting line to the Head of Fixed Income Trading or the Head of Fixed Income Sales. 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In particular, this presentation must not be distributed to any person in the United States or to or for the account of any “US persons” as defined in Regulation S of the United States Securities Act of 1933, as amended. CONFLICTS OF INTEREST/ DISCLOSURES This report contains the views, opinions and recommendations of ABN AMRO (AA) strategists. Strategists routinely consult with AA sales and trading desk personnel regarding market information including, but not limited to, pricing, spread levels and trading activity of a specific fixed income security or financial instrument, sector or other asset class. AA is a primary dealer for the Dutch state and is a recognized dealer for the German state. 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