Thursday, 3 January 2013
Chart of the Day - 10 year German bund versus 10 year Swedish government bond
"Two roads diverged in a wood and I - I took the one less traveled by, and that has made all the difference." - Robert Frost, American poet.
One of the indicator we have been following in various credit conversations has been the spread between 10 year Swedish government yields and German 10 year government yields. It looks like this relationship is breaking again this time with Swedish yields rising. Back in November 2011 in our credit conversation "The song of Roland", this relation looked like it was breaking due to a German "failed" auction which saw German yields rising above Swedish 10 year government yields. From March 2011 and during most part of 2012, German Bund yields have been moving in lockstep with 10 year Swedish government yields - source Bloomberg:
While the Swedish Krona is projected to extend gains in 2013 against the euro for a fifth year in a row (up 4% in 2012), Sweden looks most likely to avoid the euro area's recession woes this year. As reported by Niklas Magnusson from Bloomberg on the 3rd of January: "The country’s central bank, which has lowered rates four times since December 2011 to support growth, has signaled it’s now done with easing policy, which may weigh on a three-year rally in Swedish bonds. “The strong performance of the krona reflects a correction from very undervalued levels following the financial crisis of 2008, but also the relative strength of the Swedish economy and its healthy public and external balances," Kasper Kirkegaard, senior foreign-exchange strategist at Danske Bank A/S in Copenhagen, said last month in an e-mailed reply to questions."
Sweden is one of the 7 only remaining nations boasting a AAA rating with stable outlook along with Australia, Canada, Denmark, Norway, Singapore and Switzerland with a debt to GDP level at 38%.
Although the Swedish rate futures market as indicated by the same Bloomberg article is pricing a 25 bps rate cut in the June contract, given Riksbank cut on the 18th of December its benchmark rate by 25 bps to 1%, traders could be poised to some disappointment should the Swedish Central Bank decides to hold the line in 2013.