Euro rates watch final sale of attractive dsl april 2018

Marketing Communication

Euro Rates Watch

Group Economics Macro & Financial Markets

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09 November 2015

Final sale of attractive DSL April 2018 Kim Liu

• Tomorrow, the DSTA will hold the final reopening of the DSL April 2018

Senior Rates Strategist

• The target size is EUR 2.0 – 3.0bn, we think the DSTA will go for EUR 2.6bn

Tel: +31 20 343 4669

• This will push year to date funding to almost 95% of the official target

Kim.liu@nl.abnamro.com

• But we think that the DSTA has decided to issue less than its yearly target • The DSL April 2018 looks cheap and shows value in different metrics Final reopening of Dutch 3 year benchmark Tomorrow, the Dutch State Treasury Agency (DSTA) will sell for the final time its 3y benchmark, the DSL 0% April 2018. The upcoming sale will be the penultimate auction of the year. After tomorrow’s reopening, the DSTA will only auction its 10y benchmark on 24 November. For tomorrow’s sale, the announced target size is EUR 2.0 -3.0bn.

The current outstanding of the 3y benchmark bond stands at EUR 12.464bn. It has been tradition for several years now that the DSTA increases the size of its benchmark bonds with a maturity up to 10 years to at least EUR 15bn. This means that for tomorrow’s sale, the DSTA will need to raise a minimum of EUR 2.54bn. We think that the DSTA will go for an amount close to this minimum target.

Off-the-run auction details Auction Date

Tuesday 10 November

Timing

10:00 AM CET

Target Amount

EUR 2.0- 3.0bn

Settlement

12 November 2015

Source: DSTA

Bond characteristics Coupon

0%

Maturity

15 April 2018

Outstanding

EUR 12.464bn

ISIN

NL0011005137

Source: DSTA

Insights.abnamro.nl/en

Bloomberg: ABNM

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Euro Rates Watch - Final sale of attractive DSL April 2018 - 09 November 2015

Year to date funding will increase to almost 95% of official target Excluding tomorrow’s auction results, the year to date funding stands at just shy of EUR 43bn. This equates to around 90% of the official target, which is set at EUR 48bn. As stated before, there are only 2 auctions remaining of which the details have been published (see table below). If we would use our target amount of EUR 2.6bn, we calculate that the DSTA will have funded almost EUR 43bn after tomorrow’s auction, which equates to almost 95% of its official announced target size.

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

But the DSTA is likely to fund less than its yearly target However, the calculation above is using our expectation of tomorrow’s target amount.

Even if the DSTA would go for the upper limit of tomorrow’s auction and of its final auction on the 24th of November, we come to the conclusion that there is a very low likelihood that the official EUR 48bn target will be met. If so, this would be the first time in many years that the DSTA has decided to fall short of the announced target size. Indeed, in the last years the DSTA has actually raised more than the official target.

If the DSTA would decide to do the bare minimum tomorrow and in the final auction on 24 November, it could raise a combined total of EUR 4bn. The EUR 4bn composes of EUR 2.6bn for tomorrow’s auction and EUR 1.4bn for the auction on 24 November. These amounts are chosen by comparing the current outstanding amounts and the envisaged benchmark amount of EUR 15bn. By adding EUR 4bn to the year to date funding, the DSTA will then have raised EUR 46.9bn instead of EUR 48bn. We think that this scenario is far more likely. We therefore expect that at the end of the year, the DSTA will have raised an amount close to EUR 47bn.

Relative value considerations Although the Fed will likely raise rates in December, we still expect the ECB to deliver an early Christmas present this year. We think that Mr Draghi will be true to his dovish comments and will still go for an extension of the QE programme, an increase of the monthly asset purchases and for a deposit rate cut.

If this is the case, the DSL April 2018 offers an interesting opportunity as the likelihood of a deposit rate cut had been priced out in the recent days. Implied eonia forwards had been pricing in a 58% likelihood of a 10bps depo rate cut, whereas the likelihood stood closer to 70% previously. Today, Reuters reported that ECB governing council members have reached a consensus on cutting the deposit rate. This should support the front end of the government bond curve. The yield of the DSL April 2018 is now trading at around -

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Euro Rates Watch - Final sale of attractive DSL April 2018 - 09 November 2015

22bps after having traded at -26bps two weeks ago. This means that the 3y benchmark has more room to perform, especially as further deposit rate cuts could be priced in.

Next to the market pricing of possible ECB actions, we judge that the DSL April 2018 also offers value versus its neighboring bonds on the Dutch curve. More concretely, compared to other Dutch bonds, the DSL April 2018 offers an interesting positive pickup in a spread vs eonia and also in ASW terms the bond shows value.

Cross market, we note on a micro relative value level the expensiveness of the BGB 1.25% June 2018 and FRTR 4% April 2018. Especially the Belgian bond stands out as this bond is trading flat compared to the Dutch 3y bond. Also compared to the RAGB 4.65% January 2018, the DSL April 2018 shows decent value, albeit compared to the RAGB, the duration difference explains the relative attractiveness of the Dutch 3y benchmark.

Recent widening offers opportunities for 3y DSL

The Dutch 3y is trading cheap vs the 3y BGB

In bps

In bps

0

5

-10

0

-20

-5

-30 May-15

Jun-15

Jul-15

Aug-15

Sep-15

Outright yield DSLApril 2018 Source: ABN AMRO Group Economics, Bloomberg

Oct-15

-10 Feb-15

Apr-15

Jun-15

Aug-15

Oct-15

Yld Spread NETHER 0 04/15/18 vs BGB 1 1/4 06/22/18 Source: ABN AMRO Group Economics, Bloomberg

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Euro Rates Watch - Final sale of attractive DSL April 2018 - 09 November 2015

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