Euro rates watch dutch off the run auction

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Euro Rates Watch

Group Economics Macro & Financial Markets

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26 October 2015

Dutch off-the-run auction offers good value Kim Liu

 Tomorrow, the DSTA will hold its first and only off-the-run auction of 2015

Senior Rates Strategist

 Two bonds will be on sale, the target size is set at EUR 1.5 – 2.5bn

Tel: +31 20 343 4669

 We think the DSTA will need to aim for the upper half of the target range

Kim.liu@nl.abnamro.com

 This will push year to date funding to over 90% of its target  The DSL July 2019 offers interesting value against the DSL April 2017  The DSL January 2033 shows good value against the DSL July 2025 and DBR January 2031 Dutch off-the-run auction: DSL July 2019 and DSL January 2033 Tomorrow, the Dutch State Treasury Agency (DSTA) will hold its first and only off-the-run auction of this year. Initially, two off-the-run auctions were scheduled in its original funding calendar, but one off-the-run auction was cancelled due to scheduling an additional reopening of the DSL January 2047.

For tomorrow’s auction, two old benchmark bonds will be offered, the short 5 year DSL July 2019 and the old 20y benchmark, the DSL January 2033. The combined target size has been set between EUR 1.5 – 2.5bn. The auction set up is flexible, which means that the DSTA can allot the auction size across the 2 bonds at their own discretion. Although the criteria to select these two bonds were not published, the aforementioned bonds were probably chosen to accommodate the lengthening of the debt portfolio and because of the relatively low outstanding amounts. The latter reason will make sure that the redemption profile will stay evenly spread.

Off-the-run auction details Auction Date

Tuesday 27 October

Timing

10:00 AM CET

Target Amount

EUR 1.5- 2.5bn

Settlement

29 October 2015

Source: DSTA

Insights.abnamro.nl/en

Bloomberg: ABNM

2 Euro Rates Watch - Dutch off-the-run auction offers good value - 26 October 2015

Bond characteristics Coupon

4%

2.5%

Maturity

15 July 2019

15 January 2033

Outstanding

EUR 14.06bn

EUR 10.05bn

ISIN

NL0009086115

NL0010071189

Source: DSTA

The DSTA will need to raise EUR 6.75bn in the final 3 auctions After tomorrow’s auction, the DSTA will need to hold 2 auctions in the remainder of 2015.

In its Q4 update, the DSTA already published the details of these auctions (see the table below). The year-to-date funding stands at EUR 41.25bn while the capital markets goal is set at EUR 48bn. This means that an amount of EUR 6.75bn will need to be raised in tomorrow’s sale and the last two auctions.

DSTA Q4 Funding schedule Auction Date

Details

Amount (EUR bn)

13 October

Reopening DSL 2025

1.0 – 2.0

27 October

Reopening off the runs

1.5 – 2.5

10 November

Reopening DSL 2018

2.0 – 3.0

24 November

Reopening DSL 2025

1.0 – 2.0

Source: DSTA

The composition of the funding schedule is influenced by a number of factors, of which the commitment of the DSTA to raise the outstanding amounts of its benchmark bonds to at least EUR 15bn, is one of the most important features. This commitment is the reason why the DSTA will be targeting between EUR 2 – 3bn and EUR 1 – 2bn in the last 2 auctions of respectively the 3y and 10y benchmarks.

As the DSTA will adhere to its funding commitment, the DSTA will need to raise a minimum of EUR 2.6bn given the current outstanding amount of EUR 12.46bn for its 3y benchmark. For the 10y benchmark, a minimum amount of EUR 1.4bn will need to be sold, given the current outstanding amount of EUR 13.6bn. However, if our calculations are correct, the DSTA will need to issue more than the minimum amounts in these auctions to reach the envisaged capital markets goal of EUR 48bn. The reason behind this is that if we would use the capital markets goal of EUR 48bn, deduct this by the year to date funding and the minimum amounts of the 2 final auctions (EUR 3.49bn), the DSTA would need to raise EUR 2.82bn in tomorrow’s auction. However, this is slightly higher than the announced target size of EUR 1.5 – 2.5bn.

We think the DSTA will aim for the upper range, this increases funding to over 90% Another way to look at this funding dilemma is to use the upper levels of the target ranges of the last 2 auctions. If we take the amount which the DSTA will need to raise (EUR 6.7bn) and deduct this with the upper levels of the last 2 auctions (EUR 3 and 2bn), we calculate that the DSTA will need to raise a minimum of EUR 1.75bn in tomorrow’s

3 Euro Rates Watch - Dutch off-the-run auction offers good value - 26 October 2015

auction. As we expect that the DSTA wants to have some flexibility in the final 2 auctions, we think it is likely that the DSTA will go for an auction size which lies in the upper end of the announced target range. If the DSTA would go for the middle of the announced target size (EUR 2bn), the year to date capital funding will rise to 90% of its goal. This means that if the DSTA would raise more than EUR 2bn, the year to date funding will increase to over 90% of the capital markets target.

Relative value considerations We think that the ECB will be delivering an early Christmas present this year, following the very dovish comments made by ECB head Mario Draghi last week. Our base case is that the ECB will step up its QE programme by increasing the size of the monthly purchases

by EUR 20bn to EUR 80bn. We also expect it to extend the duration beyond September 2016. Following the ECB press conference, we think the probability that a deposit rate cut will be added to these measures has sharply increased. If the deposit rate is cut, it will most likely be by 10bps, taking it to -0.3%.

The market has already priced in this possible policy action as the front end of the yield curve rallied, taking the yield of 2y Schatz from -26bps to -33bps. The Dutch equivalent, the DSL April 2017, is currently trading at around -31bps. Given the already tight levels, we do not think that in the short term there is considerate room for the 2y paper to perform further. For the DSL July 2019, we do see more room to perform, most notably as part of a 2s5s trade. Currently, the DSL July 2019 – DSL April 2017 trades at a spread of 15.5bps, whereas the German equivalent (DBR July 2019 - BKO March 2017) trades at a spread of 8.5bps. We think therefore that the extra curve spread in Dutch 2s5s offers reasonable relative value. Cross market, we note that the Finnish equivalent (RFGB 4 3/8 July 2019) is trading expensive against the DSL July 2019. This spread is flat, which offers from a micro relative value perspective some value. In a yield spread versus the German equivalent, we do not see sufficient room for performance.

Dutch 2s5s still offers value

Finnish bonds are trading expensive vs Dutch bonds

In bps

In bps

35

4

30

3

25

2

20 15

1

10

0

5

-1

0 Jan-15

Mar-15

May-15

Jul-15

Sep-15

Yld Spread NETHER 4 07/15/19 vs NETHER 0 1/2 04/15/17 Source: ABN AMRO Group Economics, Bloomberg

-2 Jan-15

Mar-15

May-15

Jul-15

Sep-15

Yld Spread RFGB 4.375 07/04/19 vs Nether 4 07/15/2019 Source: ABN AMRO Group Economics, Bloomberg

We think that the DSL January 2033 shows value on its curve versus its 10y benchmark, the DSL July 2025. Here the spread trades at 47bps, which is the widest since the inception of the Dutch 10y benchmark in March of this year. This trade offers value rather in the long

4 Euro Rates Watch - Dutch off-the-run auction offers good value - 26 October 2015

term than short term as 10s30s lags directional QE movements in 2s, 5s and 10s. This could mean that the trade is exposed to price movements in shorter areas. However, we judge that 10s30s should also benefit from a stepping up of the QE programme. Another spread which is interesting in our view is the yield spread of the DSL January 2033 versus the DBR January 2031. This spread is trading at almost 26bps, which is almost double of the levels seen in the beginning of the year.

DSL 2033 – 2025 is trading at its steepest level in 2015

Long end DSL – Bund spread shows good value

In bps

In bps

60

30

50

25

40

20

30

15

20

10

10

5

0 Mar-15

May-15

Jul-15

Sep-15

Yld Spread NETHER 2 1/2 01/15/33 vs NETHER 0 1/4 07/15/25 Source: ABN AMRO Group Economics, Bloomberg

0 Jan-15

Mar-15

May-15

Jul-15

Sep-15

Yld Spread Nether 2.5 01/15/2033 vs DBR 5.5 01/04/2031 Source: ABN AMRO Group Economics, Bloomberg

5 Euro Rates Watch - Dutch off-the-run auction offers good value - 26 October 2015

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