SPAIN AUCTION RESULTS: Bono/Obli Results

The likely head investment manager of the planned German debt-funded sovereign wealth fund gave some updated info on its setup in an interview here. The fund is planned to have around a E200bln size by 2036, with the intention that it can use the spread between Bund yields and expected returns on global equity investment to plug holes in the German statutory (currently fully pay-as-you-go funded) pension scheme. 

• Planned gross returns are 6% compared to estimated bund yields at 3% (10y Bund yields remained below 3% constantly during the current cycle).
• Initial plans are for a 80% public equities and 20% private equity / infrastructure split. Across regions, plans are 40% Europe, 40% US, and 20% RoW.
• Investment will be spread over time: E12bln in 2025 (some initial equity investment on top), then growing by 3% per year until 2036. The debt investments are included in the current federal net issuance estimates.
• First payouts to the pension scheme are planned for 2036, but conditional on 10% net investment gains being reached cumulatively.
• A net return of 3% on a E200bln fund would yield around E6bln income per year - 1.6% of E380bln statutory pension expenditure in Germany.
• There was no specific info in the interview if the international investments will be FX-hedged or not.
• The head manager said consensus for the setup of the fund is wide-spread across parties, so also if the current traffic light coalition is not able to finish the setup, it seems likely the fund will be implemented at some point.
• However, there already appear to be some delays, as the fund was initially planned to be passed by this Summer. The plans are currently still being discussed in a federal parliamentary committee.
• Anja Mikus (the planned head manager) is currently CEO/CIO of the German nuclear waste disposal fund KENFO, which is also planned to be responsible for the pension fund until 2026. After then, a separate entity could be set up.

EXECUTIVE SUMMARY

• A string of soft domestic activity data has shifted consensus towards a 50bp Riksbank cut in November to 2.75%, with markets tilted heavily towards that outcome.
• The door was opened to a 50bp cut in the September policy statement, which noted that rates would likely be cut in November and December “if the outlook for inflation and economic activity remains unchanged”, with a 50bp cut “possible at one of these meetings”.
• We think there is enough of a case for a 50bp cut to be delivered. The inflation outlook continues to appear consistent with the Riksbank’s 2% target, and growth concerns remain prevalent both domestically and in the Eurozone.
• The weak SEK presents the obvious case for a more cautious 25bp cut, which would be the most hawkish scenario for markets. Of the 16 analyst previews we have seen, only 1 looks for such a move.

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