Marketing Communication
Euro Rates Watch
Group Economics Macro & Financial Markets
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.
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
2
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 -
3
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
4
Euro Rates Watch - Final sale of attractive DSL April 2018 - 09 November 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. The view of the Strategists may differ (materially) from the views of the Fixed Income Trading and sales desks or from the view of the Departments conducting ‘Investment Research’ or other divisions This marketing communication has been prepared by ABN AMRO Bank N.V. or an affiliated company (‘ABN AMRO’) and for the purposes of Directive 2004/39/EC has not been prepared in accordance with the legal and regulatory requirements designed to promote the independence of research. As such regulatory restrictions on ABN AMRO dealing in any financial instruments mentioned in this marketing communication at any time before it is distributed to you do not apply. This marketing communication is for your private information only and does not constitute an analysis of all potentially material issues nor does it constitute an offer to buy or sell any investment. Prior to entering into any transaction with ABN AMRO, you should consider the relevance of the information contained herein to your decision given your own investment objectives, experience, financial and operational resources and any other relevant circumstances. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice on issues that are of concern to you. Neither ABN AMRO nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication. Any views or opinions expressed herein might conflict with investment research produced by ABN AMRO. ABN AMRO and its affiliated companies may from time to time have long or short positions in, buy or sell (on a principal basis or otherwise), make markets in the securities or derivatives of, and provide or have provided, investment banking, commercial banking or other services to any company or issuer named herein. Any price(s) or value(s) are provided as of the date or time indicated and no representation is made that any trade can be executed at these prices or values. In addition, ABN AMRO has no obligation to update any information contained herein. This marketing communication is not intended for distribution to retail clients under any circumstances. This presentation is not intended for distribution to, or use by any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation. 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. To the extent that this report contains trade ideas based on macro views of economic market conditions or relative value, it may differ from the fundamental credit opinions and recommendations contained in credit sector or company research reports and from the views and opinions of other departments of AA and its affiliates. Trading desks may trade, or have traded, as principal on the basis of the research analyst(s) views and reports. In addition, strategists receive compensation based, in part, on the quality and accuracy of their analysis, client feedback, trading desk and firm revenues and competitive factors. As a general matter, AA and/or its affiliates normally make a market and trade as principal in securities discussed in marketing communications. ABN AMRO is authorised by De Nederlandsche Bank and regulated by the Financial Services Authority; regulated by the AFM for the conduct of business in the Netherlands and the Financial Services Authority for the conduct of UK business. Copyright 2015 ABN AMRO. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without ABN AMRO's prior express consent.