SEB urges investors to position for flatter Swedish yield curve

Following on from poor macroeconomic news, Sweden’s SEB has urged investors to prepare for a flatter yield curve in the country as falling fuel and mortgage costs push core inflation negative by December.

SEB expects inflation to remain below zero “during most of H1 2013.”

“Furthermore, we expect Swedish GDP growth near zero in H2 2012 in an environment characterised by lacklustre internatinoal growth and declining euro-zone GDP.” The bank stated in its latest Fixed Income Insights report.

The Swedish inflation rate is now forecast to hig -0.5% year-on-year by April 2013, SEB said.

The country may do relatively better than many other economies in Europe going forward, but its cyclically sensitive export industry will be hit by any global economic weakness. Unemployment is expected to continue increasing into 2013, which also helps explain why SEB now expects an interest rate cut when the central bank makes its next rates announcement on 18 December.

SEB is pricing in a 25 basis points cut, taking the repo rate tp 1%, and then further down to 0.75% by February.

“Our Swedish GDP forecast is low compared to both Riksbank and consensus projections,” SEB said.

Cuts to interest rates will bring Sweden’s rates closer to peers such as Norway. There it expects no rate cut when Norges Bank makes its next announcement on 19 December. And SEB noted that the Bank of England left its rate unchanged on 8 November, as did the ECB. The Federal Reserve is also expected to leave its rates unchanged on 12 December.

The changes in interest rate differentials explain why SEB sees opportunity in carry.

“While positive CPI m/m in September renders very near-term inflation carry positive, our expected negative November CPI and especially January CPI of -0.8% m/m will subsequently result in negative CPI carry. Essentially, this means that while outright long inflation-linked bond positions will have negative carry, short positions will have positive carry,” SEB said.

“Because the CPI carry effect in basis point terms is the largest in short maturities, a real yield curve flattener will generally have positive carry during periods of negative inflation accrual.”


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