Danske Research - Danske Bank Research

Investment Research

9 December 2017

Fixed Income Research Norges Bank to sell NOK3bn in NGB NST 475, 2.00%, ’23 Norges Bank is tomorrow (10 January) set to tap the government bond NST 475 (23 May 2023) with a volume of NOK3bn. In ASW terms and versus international peers NST475 is somewhat expensive at present and the potential for ample supply in the mid-segment in Q1 may be an argument against bidding aggressively at the upcoming auction. It is a bit surprising to us that Norges Bank has chosen to tap the mid-segment bond NST 475, given that the bond was tapped as recently as the NGB auction on 6 December. Total outstanding to the market after the auction will be NOK53bn. In recent years, Norges Bank has introduced a new bond every year, while previously bonds were introduced every second year. NST 475 is the oldest of these annual bonds. That is, there is a two-year gap between NST 475 and the shorter bond NST 474 (25 May 2021). Volume to the market of NST 474 is at present NOK71bn. Given that NST 475 represents a smaller segment of the yield curve than NST 474, the supply of NST 475 already appears ample relative to shorter bonds. The recent mid-segment NST 475 ASW spread widening is probably to some degree a delayed spillover from a steepening of the euro swap curve, while the recent short-end AWS widening is linked to a larger degree to a potential NOK Q1 rally. In Reading the Markets Norway – Potentially stronger NOK to be a key driving force for Norwegian fixed income, 8 January, we argue that the effect of the euro spillover may be somewhat overdone. Therefore, relatively speaking, the potential for further asset swap spread widening is probably marginally higher for NST 473 and NST 474 than for NST 475. Norges Bank plans to introduce this year’s new 10Y benchmark bond through syndication in collaboration with primary dealers. Previously, it has placed initial issues in the market through a Dutch auction, i.e. in the same way as subsequent taps. The date of introduction of the new bond moves from Q1 to Q2 and the volume may be more than the NOK5-6bn to the market we have seen in recent years. For this innovation to succeed, Norges Bank may starve the market for long time to create significant pent-up demand ahead of the syndication. This could imply ample supply in the mid-segment short term. A total of four taps is planned for Q1.

Today’s key points  Norges Bank is set to tap the five-

year bond NST 475, 2.00%, 24 May 2023. The volume will be NOK3bn.  The asset swap spread of the NST

475 is –39bp (mid), with a spread versus German peers of around 129bp.  Compared with before the auction

in NST 475 on 6 December, relative pricing suggests the bond is somewhat expensive at present  The syndication innovation for the

initial issue for the new 10Y benchmark in Q2 may suggest Norges Bank will focus on tapping in the short and mid-segment during the spring, i.e. supply in the mid-segment may become somewhat ample. A total of four auctions is planned in Q1.

Currently, the asset swap spread of NST475 is c.39 and the spread of the 5Y segment versus Germany is c.129bp. Given that NST 475 appears to us relatively expensive, it may not be critical to bid excessively at the upcoming auction at the current market. NGB NST 475, asset swap spread and 5Y spread vs German peer -44

1.5

-42

1.45

-40

1.4

-38 1.35

-36 1.3

-34

1.25

-32 22.05.2017

-30

22.07.2017

22.09.2017

22.11.2017 1.2

NST 475 ASW

Spread NO DE 5Y

Source: Norges Bank, Danske Bank

Important disclosures and certifications are contained from page 3 of this report.

Chief Strategist Jostein Tvedt +47 23 13 91 84 [email protected]

www.danskeresearch.com

Fixed Income Research

Norwegian government bonds – key data NST 478 and 479 ASW spread

10Y spread vs German peer

-38

1.3

-36

1.25

-34

1.2

-32

1.15

Details of most recent tap

Bond Date Duration Bid-to-cover Price Yield

1.1

-30

1.05

-28

1

-26

0.95

-24

0.9 -22 May 17

Jul 17

-20

Sep 17

Spread NO DE 10Y(RHS)

0.85

Nov 17

NST 478 ASW

NST 475 24-May-2023 5.13 2.41 104.74 1.10

0.8

NST 479 ASW

22.05.2017

22.07.2017

22.09.2017

22.11.2017

Source: Danske Bank

Source: Danske Bank

Source: Norges Bank

Asset swap spreads

Spread vs German peers

NGB and NOK swap curve

-70

-70

-65

-65

-60

-60

-55

-55

-50

-50

-45

-45

-40

-40

-35

-35

-30

-30

-25

-25

-20 Oct 17

-20 Nov 17

Dec 17

NST 473 ASW

NST 474 ASW

NST 476 ASW

NST 477 ASW

NST 475 ASW

1.8

1.8

1.6

1.6

1.4

1.4

1.2

1.2

1.0

1.0

0.8

0.8

0.6

0.6

2.0

1.5

1.0

0.4 Jan 14

0.4 Jan 15

Spread NO DE 2Y

Jan 16 Spread NO DE 5Y

Jan 17

0.5

0.0 Mar 17

Dec 19

Aug 22

Yield

Spread NO DE 10Y(RHS)

May 25

SWAP

Source: Danske Bank

Source: Danske Bank

Source: Danske Bank

FX EUR/NOK and interbank spread

FX USD/NOK and crude oil price

Norwegian bond holdings by sector end-Q3 17 90

10.5

1

10.0

1.1

9.5

1.2

9.0

1.3

9.3 8.8

1.5

7.5

1.6

70

40

60

50

50

60

40

7.3

70

6.8

80

1.4

8.0

80

30

8.3 7.8

8.5

20

90 6.3 100

7.0 jan. 14

jan. 15

EURNOK

jan. 16

jan. 17

1.7 jan. 18

Spread 3m interbank NOK vs EUR (rhs)

5.8 5.3 jan. 14

110 jan. 15

jan. 16

jan. 17

120 jan. 18

USDNOK

30 20 10 0 NGB 2019

NGB 2021

Foreign sector

NGB 2023 Banks

NGB 2024 L&P

NGB 2025

Govt sector

United States, Crude Oil, Brent Europe Spot Price FOB, USD

Source: Danske Bank, Macrobond Financial

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9 December 2017

Source: Danske Bank, Macrobond Financial

NGB 2026

Source: Norges Bank


NGV 2027 Other


Disclosures This research report has been prepared by Danske Bank A/S (‘Danske Bank’). The author of this research report is Jostein Tvedt, Chief Strategist. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst’s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. 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It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Norges Bank in the next three months. Danske Bank has made no agreement with Norges Bank to write this research report. No parts of this research report have been disclosed to Norges Bank. No recommendations or opinions have been disclosed to Norges Bank and no amendments have accordingly been made to the same before dissemination of the research report. The analysts responsible for this report are prohibited from trading against their own recommendations. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual fixed income asset. Danske Bank bases its conclusion on an estimation of the financial risk profile of the financial asset. By combining these risk profiles with market technical and financial asset-specific issues such as rating, supply and demand factors, macro factors, regulation, curve structure, etc., Danske Bank arrives at an overall view and risk profile for the specific financial asset. Danske Bank compares the financial asset to those of peers with similar risk profiles and on this background, Danske Bank estimates whether the specific financial asset is attractively priced in the specific market. Danske Bank expresses these views through buy and sell recommendations. These signal our opinion about the financial asset’s performance potential in the coming one to three months. More information about the valuation and/or methodology and the underlying assumptions is accessible via http:http://www.danskebank.com/en-uk/ci/products-services/markets/research/pages/researchdisclaimer.aspx. Select Fixed Income Research Methodology.

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9 December 2017



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Report completed: 9 January 2018, 10:43 CET Report first disseminated: 9 January 2018, 11:55 CET

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