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

and DSLs maturities, which are now above 3.50%,
could explain that temporary richening. On Bonos,
the richening of the 30y is actually a higher premium
over 10y Bonos, which pushed the 10y/30y
Bono/Bund box to low levels (see Chart 4). However,
the GGB 10y/30y inversion since April 2010 does not
give any incentive to jump into 2020/2040 Bono
steepeners.
Recommended trades
Bund July 20 / July 39 spread steepeners
As stressed earlier, the Bund segment has
overreacted to the shift in ECB expectations since
October and appears more than 10bp too flat. Use
any pullback to 44/46bp to enter steepeners,
targeting the 55/58bp area. For HF, the safest trade
would be to remove the money curve component
through Euribor U1U2 steepeners (Euribor DV01 15k
vs. 100k Bund steepeners). 1-mth profit of carry:
1.1bp per month.
10y/20y/30y swap fly receivers
After a period of stabilisation in the low 60s, the 20y
swap has finally recovered, allowing the swap fly to
move towards the low 50s. Book profits on our
48/50bp target.
Sell BTP Feb 37 vs. BTP Sep 40
As Chart 5 illustrates, this spread has dramatically
decoupled from the 10y/30y BTP flattening since late
November. With the 2037/40 spread almost back at
2010 highs while the 2020/40 BTP spread has
flattened 25bp, holders of BTP Feb 37 should take
advantage of the current high spread level to switch
into BTP Sep 40. The spread of around 15.5bp
should tighten back to October lows around
9/10bp.
Sell Bono July 40 vs. BTP Sep 40
After a 35bp compression since late December, the
30y BTP/Bono spread has stabilised in a tight
40/50bp trading range. Using the conditional
distribution approach, any tightening to the mid 30s
would provide very good entry levels, targeting
December’s mid-60s (peak of Q4 2010 regime).
Enter widening trades on a compression to the
35/40bp area, targeting the mid 60s.
30
25
20
15
10
Chart 3: 10y/30y OAT/DSL Box: 30y DSL Too
Expensive
5
OAT Apr 20 / DSL 42
expensive
OAT Apr 20/DSL
42 cheap
0
May-10 Aug-10 Nov-10 Feb-11
Source: BNP Paribas
DSL July 20/OAT Apr 20/Jan 42/OAT Apr 41
Chart 4: 2020/40 Cash Boxes vs. Bund: Bono
Back at its Lows while BTP One is the Highest
45
35
25
15
5
-5
-15
-25
Apr-10 Jun-10 Aug-10 Oct-10 Dec-10
2020/40 OAT/Bund 2020/40 ATS/Bund 2020/40 olo/Bund
2020/40 BTP/Bund 2020/40 Bono/Bund
Source: BNP Paribas
Chart 5: 10y/30y BTP & 2037/2040 BTP Spreads
1.1
1.05
1
0.95
0.9
0.85
0.8
0.75
0.7
0.65
0.6
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Dec-10 Jan-11 Feb-11
BTPS 5.00 01/09/40 / BTPS 4.00 01/09/20
Source: BNP Paribas
BTPS 5.00 01/09/40 / BTPS 4 1/2/37 (R.H.S)
Chart 6: 2040 BTP/Bono Distribution
Conditional on 2020 Spread: Selling Area
around 35/40bp
0.18
0.17
0.16
0.15
0.14
0.13
0.12
0.11
0.1
4.5
4
3.5
December regime
3
2.5
2
Selling
area
1.5
1
0.5
0
0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9
Source: BNP Paribas
Eric Oynoyan / Ioannis Sokos 20 January 2011
Market Mover, Non-Objective Research Section
42
www.GlobalMarkets.bnpparibas.com