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Reopening DSL April 2018

Group Economics

Macro & Financial Markets Research

Kim Liu

+31 20 343 4669

[email protected]

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.

08 June 2015

Tomorrow, the DSTA will hold the second tap of its 3y benchmark bond

We expect a size of close to EUR 3bn, which will take YTD funding to over 60% of its target

Various factors could lead to scarcity value of short-dated Dutch bonds in the remainder of 2015

The Dutch bond offers moderate value vs Germany and in outright yield

Cross market, the DSL April 2018 offers good value vs Finland and vs France

Second reopening, expected target size around EUR 3bn

Tomorrow, the DSTA will tap its 3y benchmark, the DSL April

2018, for the second time this year. The sale follows the initial

launch in January and the first reopening in March of this year.

The DSTA aims to raise the outstanding amount of the bond to

at least EUR 15bn before the end of the year. Currently, the

outstanding amount is just slightly above EUR 6bn. For

tomorrow, the DSTA aims to auction a size between EUR 2.5 –

3.5bn. We expect the bond to be reopened another two times

after tomorrow’s transaction. In order to achieve the

benchmark size at the end of the year, we expect the DSTA to

aim for around EUR 3bn in tomorrow’s sale of its 3y

benchmark.

Auction details

Auction Date Tuesday 9 June

Timing 10:00 AM CET

Target Amount EUR 2.5 – 3.5bn

Settlement 11 June 2015

Source: DSTA

Bond characteristics

Coupon 0.00%

Maturity 15 April 2008

Outstanding EUR 6.368bn

ISIN NL0011005137

Source: DSTA

YTD funding to rise to 65% of yearly target

In its Q2 Quarterly Outlook, the DSTA updated its yearly total

borrowing requirement to EUR 94.8bn. Almost half of this

amount (EUR 48bn) will be raised on the capital markets. The

other half will be raised by the issuance of money market

products, like T-bills. Year to date, the DSTA has held 9 bond

auctions in which it has raised EUR 26bn. This means that

year to date, the DSTA has already raised more than half of its

yearly issuance. Including tomorrow’s sale, the year to date

issuance will increase to 65% of its target.

Money market issuance acts as an buffer

To raise the total borrowing requirement, the DSTA issues

money and capital market instruments. The issuance of money

market instruments acts as a buffer, which means that

shortfalls or windfalls in the government cash balance will have

an direct effect on the issuance of these products. The cash

balance can be impacted by various drivers, like the

government budget deficit but also other cash flows.

Various factors point to cash windfalls…

Signs are building that the government will benefit from several

cash windfalls this year. Firstly, in its Spring Memorandum, the

Dutch government said that the EMU balance is expected to

improve by 0.1% to -2.1% of GDP. The impact on the cash

balance will become visible when the DSTA will update its

funding programme at the start of Q3.

However, the cash balance was already better than expected

this year. Main reason for this was the fall in yield, which

results in more inflow of cash collateral by banks due to the

hedging programme of the DSTA. As a result, the DSTA

decided to cancel a T-bill programme and extend its buyback

2 Euro Rates Weekly - Reopening DSL April 2018 - 08 June 2015

facility. Under its expanded buyback facility the DSTA can now

also buy bonds up to T+24 months. Next to these funding

related cash flows there is also another event which could

result in a significant cash inflow, which is the scheduled

privatisation of ABN AMRO. The Dutch ministry of Finance has

decided that between 20% and 30% of the shares of ABN

AMRO will be sold via an IPO in Q4 of 2015.

… which could lead to scarcity value of short dated paper

The normal reaction function of the DSTA would be to

incorporate future cash inflows in its projections. This could

result in a reduction of money market funding. If this is true,

than the DSTA will need to revise the issuance of T-bills further

downwards. Furthermore, it could also decide to step up its

buyback programme of bonds. Both decisions will lead to lower

availability of shorter dated paper. This would in turn increase

scarcity value of shorter dated paper, which would be also

beneficial for the 3y bond.

Relative value considerations

The Nether April 2018 currently trades at around -4bps in

outright yield, after having reached a low in April at around

-18bps. Today’s level is only 2bps more expensive than the

original level at which the bond was issued at the beginning of

the year. Although the outright yield is still not positive, we

think that its attractive enough to draw sufficient investor

demand.

Attractiveness against Bunds

Compared to German bonds, the attractiveness of the Dutch

3y benchmark is moderate. The Nether April 2018 trades at

+8bps vs the OBL April 2018. The bond has traded on the wide

at +10bps in February, while the most expensive level at

+4.5bps was reached at the end of May. On a maturity

matched Nether – Bund curve, the Nether April 2018 offers

also moderate attractiveness.

Cross market value against France and Finland

The bond offers more value on a cross market basis,

especially against France and Finland. The 3y Dutch

benchmark is trading practically flat against the FRTR April

2018, which has a much higher coupon, but only a slightly

lower duration. Against the shorter RFGB September 2017, the

Dutch 3y benchmark is trading almost at its steepest level of

2015. Indeed, the current level is partly because of the

steepening of the short end curve. However, it does offer a

good switch alternative for investors who want to step out

Finland as Moody’s has revised its outlook to negative.

Outright yield of 3y bond has gained attractiveness

In bps

Source: ABN AMRO Group Economics, Bloomberg

DSLs vs Bunds are moderately attractive

In bps


Dutch 3y benchmark trades flat vs comparable FRTR

In bps


-20

-15

-10

-5

0

Jan-15 Feb-15 Mar-15 Apr-15 May-15

Yield of DSL April 2018

-5

0

5

10

15

20

15 16 17 18 19 19 20 21 22 23 23 24 28 33 37 42 47

German - Nether yield spread curve

-6

-4

-2

0

2


Yld Spread DSL April 2018 - FRTR April 2018


3y DSL – RFGB spread is trading cheap

In bps


0

4

8

12


Yld spread DSL April 2018 - RFGB Sept 2017


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