DCSIMG

Finland entering the market with a new 5-year EUR benchmark

The Republic of Finland has set initial price thoughts on a new 5-year EUR benchmark at mid-swap minus 15bp area. Books are likely to open tomorrow morning. Please find below some key strengths of Finland as well as suggestions on switches to the new bond.

Despite problems, Finland enjoys numerous strengths

Finnish economy has not had it particularly easy lately, and there is no denying the fact that also Finland is in dire need of structural reforms to tackle the challenges ahead. That said, Finland remains well-positioned relative to most other Euro-zone economies and still has good prerequisites to reform the economy.

Among the key strengths of Finland are

  • The only Euro-zone country having a AAA-rating with stable outlook from all the three major rating agencies
  • General government debt of 53% of GDP (in 2012), well below the Euro-zone average of 92.7% (or 81.9% for Germany)
  • The economy exited recession already in Q1 of this year
  • Healthy banking sector
  • Lowest CDS level among Euro-zone countries
  • Relatively low share of exports going to the Euro zone (32% in Jan-May 2013)
  • Consensus-based political culture and a culture of paying back what is owed
  • Commitment to a welfare state (preparedness to pay relatively high taxes)
  • Educated work force

 

Switch suggestions

As often the case, Finnish bonds have cheapened ahead of the launch of a new bond. Currently, Finnish bonds offer roughly 30bp of pick-up over Germany in the 5-year sector, while they are slightly more expensive vs Austrian and Dutch bonds.

It is notable that Finnish bonds are trading at more clearly expensive levels in the 10-year sector of the curve compared to Dutch and Austrian bonds, while the 5Y spreads are much narrower. In other words, the 5-year sector of the Finnish curve currently looks quite good.

After the recent move higher in rates, maturity extensions offer more pick-up again.

In light of the above, especially switches from the following bonds into the new bond look interesting

  • 3-5-year German bonds, which look expensive on the curve, e.g. OBL 164 0.5% Oct 2017
  • RAGB 4% Sep 2016
  • NETHER 0% Apr 2016
  • 2-5-year Finnish bonds, e.g. RFGB 1.75% Apr 2015

 

Selected bonds vs swaps prior to the launch of a new Finnish 5Y benchmark

ASW 2013-0827

Source: Nordea Markets and Reuters

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