Market Economics | Interest Rate Strategy - BNP PARIBAS ...

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is much more responsive to rates at the same level of moneyness and the WALA ramp is also considerably steeper. We would expect speeds on new WALA CKs to surpass that of Gold 4.5s fairly soon at current rate levels. Chart 8: Front Sequential Analytics (Tuesday close, indicative only) Price OAS OAD OAC PRLM PB-1566 A 103-18+ -3 3.8 -3.0 PRLM PB-1571 A 103-05 -15 3.1 -3.3 Source: BNP Paribas, Yield Book Chart 9: Front Sequential Analytics at Rate Shocks (Tues close, indicative only) WAL -300 -200 -100 0 100 200 300 PRLM PB-1566 A 1.15 1.40 2.06 3.59 6.74 7.92 8.36 PRLM PB-1571 A 0.98 1.08 1.54 2.40 7.22 8.32 8.72 Yield -300 -200 -100 0 100 200 300 PRLM PB-1566 A 1.227 1.799 2.627 3.392 3.871 3.955 3.981 PRLM PB-1571 A 0.961 1.287 2.219 3.014 3.960 4.024 4.044 Source: Yield Book Anish Lohokare / Timi Ajibola 20 January 2011 Market Mover, Non-Objective Research Section 38 www.GlobalMarkets.bnpparibas.com
EUR: Liquidity is No Stress • The reserve maintenance period started with a lower level of liquidity, fuelling concerns of potential tension on eonia. Chart 1: Excess Liquidity has Declined • However, with no stress on liquidity given the ECB’s pipeline for the next few months, tensions will remain limited. The eonia curve will resteepen over the next couple of weeks. • STRATEGY: Take advantage of a flattening correction on ERs to re-enter bear steepeners. Lower demand at the ECB… Demand at this week’s ECB tenders fell slightly short of levels expiring. The ECB allotted EUR 247.3bn while EUR 248.2bn were maturing. This was a little surprising as demand usually increases during the first week of the reserve maintenance period. Indeed, banks usually hold more than reserve requirements in their current accounts during the first part of the reserve period, in order to avoid the risk of running out of cash before the period ends. In such a context and given lower liquidity, there was the risk of tensions on eonia beyond the usual rise on the last day of the previous reserve period. …as long as the ECB pipeline remains open The lack of stress apparent in banks’ demand at ECB tenders can be explained by the fact that near term, i.e. at least until April, the ECB will continue to provide liquidity on request without any cap. There is therefore no hurry to ask for a large excess of liquidity. In addition, it seems that banks adjusted their level of excess reserves at the start of the new reserve period. They currently hold EUR 222bn in their current accounts (EUR 9.7bn above requirements), while excess reserves are usually closer to EUR 40-50bn at the start of the period. Moreover, while demand at the MRO fell, demand at the LTRO (3 weeks) rose. This will prevent stress from developing. A gradual resteepening at the front end Beyond the first couple of days at the start of the period, it makes sense that eonia should decline. This will go along with a steeper spot eonia curve. Steepening pressures will also resume on the ER curve. After last week’s ECB press conference, the ER1-ER steepened 15bp under selling pressures. From a peak of 75bp, the spread tightened back to 72.5bp. Over the next few days, the potential for a bull-flattening correction on ERs will fade. The regime at the front end has changed. For sure, the ECB did not want to flag up the risk of a rate hike Source: BNP Paribas Source: BNP Paribas Chart 2: Excess Reserves Lower over the next few months. But the ECB is gradually reassessing risks. Last year, bear-steepening movements at the front end offered bull-flattening trade opportunities. This year, the opposite is true. The current movement on the Euribor curve is temporary. A flattening below 70bp along with an ERH2 close to 98.25 offers an opportunity to re-enter bear steepeners. It is worth noting that, over the long run, the average spread between the refi and the 3mth Euribor is 15-20bp in a status quo, rises to 35bp ahead of a rate hike cycle and is close to 50bp when the rate hike process starts. As long as the market discounts a rate hike by early 2012, the Mar12 implied rate must be at least 1.75%. Strategy: Beyond a near-term correction, there is no scope for a bullish bias on ERs. Benefit from a bullflattening correction to re-enter bear steepeners. Patrick Jacq 20 January 2011 Market Mover, Non-Objective Research Section 39 www.GlobalMarkets.bnpparibas.com
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Page 3 and 4: The obvious focal point is the Summ
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Page 7 and 8: US monetary conditions, because the
Page 9 and 10: Chart 9: Asia- Ifo Expected Inflati
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Page 13 and 14: Canada: Betting on Investment and E
Page 15 and 16: Eurozone Inflation: Forecast Revisi
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Page 19 and 20: On the basis of the relationship be
Page 21 and 22: The nominal policy rate and nominal
Page 23 and 24: households. Furthermore, the statis
Page 25 and 26: Norway: Norges Bank Preview • We
Page 27 and 28: Japan: New Cabinet and Policy Outlo
Page 29 and 30: Japan: Capex Outlook • Core machi
Page 31 and 32: US/EUR Spreads: Further Tightening
Page 33 and 34: US: Could the Short End Have a Puls
Page 35 and 36: Trades with higher hit ratio and Sh
Page 37: ange bound, as we expect, given tha
Page 41 and 42: EMU Debt Monitor: Trade Ideas • K
Page 43 and 44: EMU Debt Monitor: CDS Analysis Char
Page 45 and 46: EMU Debt Monitor: Redemptions • O
Page 47 and 48: EUR: Buy 3m5y Straddle vs 3m10y Str
Page 49 and 50: Global Inflation Watch Eurozone HIC
Page 51 and 52: Table 2: BNP Paribas' Inflation For
Page 53 and 54: Inflation: With Supply Comes Opport
Page 55 and 56: Pricing Date Repo Rate Sett. Date T
Page 57 and 58: Germany 10y: MT 61.8% (3.12) break
Page 59 and 60: Travelling Asia • Inflation has e
Page 61 and 62: Capitalism requires business cycles
Page 63 and 64: EURUSD Rally Eyes 1.3750-1.3950 •
Page 65 and 66: Currency Spot Trade Recommendations
Page 67 and 68: than an unrelenting rise in prices
Page 69 and 70: Economic Calendar: 21 - 28 January
Page 71 and 72: Key Data Preview 120 115 110 105 10
Page 73 and 74: Key Data Preview Chart 5: French Sa
Page 75 and 76: Key Data Preview 10 5 0 -5 -10 -15
Page 77 and 78: Key Data Preview 3 2 1 0 -1 Chart 1
Page 79 and 80: Economic Calendar: 31 Jan - 25 Feb
Page 81 and 82: Next Week's T-Bills Supply Date Cou
Page 83 and 84: Economic Forecasts GDP Year 2010 20
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