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

EMU Debt Monitor: Trade Ideas
• Stay long DSL July 14 versus BTAN July 14.
• Buy CTZ Dec 12 versus BTP Dec 12.
• Book profits on 2012/2015 BTP steepeners.
• Sell BTP June 13 versus BTP Nov 15.
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Chart 1: 2013/2020, 2014/2020 DSL/OAT ASW
Box: DSL 2014 Back to Cheap Levels
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6
4
2
Stay long DSL July 14 versus BTAN July 14
In late November, we recommended selling BTAN
July 14 versus DSL July 14 at 15bp to benefit from
the low level of the 2012/2014 DSL/BTAN box (i.e
DSL July 14 too cheap). Our view was that the
spread would widen back close to June’s high
around 23/25bp. After widening to the low 20s by late
December, 2013 to 2014 DSL/BTAN spreads
tightened back massively returning to 13bp in the
wake of the new 3y DSL supply this week and the
non-core spread tightening. Even though the bulk of
DSL supply in Q1 will focus on the short end, the
10bp compression of the 2014/2020 DSL/BTAN box
(Chart 1) seen recently makes DSL/BTAN widening
trades attractive in terms of their risk/reward profile.
The short July 14 BTAN versus DSL July 14 trade
is still worth playing targeting 23/25bp again.
Buy CTZ Dec 12 versus BTP Dec 12
Dec 12 CTZ launched in late December has
recovered slightly versus BTP Dec 12 but is still
trading very cheap. Chart 2 plots CTZ/BTP spreads
from Sep 11 to Dec 12 maturities. The Dec 12
CTZ/BTP spread is clearly trading too wide
compared to other maturities which are hovering
around 10bp with the exception of Sep 11. In spite of
a temporary spread rewidening on the next CTZ Dec
12 taps, the Dec 12 CTZ/BTP spread should
gradually converge to the low 10s. Holders of BTP
Dec 12 should switch into CTZ Dec 12 on any
temporary spread widening to 21/22bp. A gradual
return to the low 10s is expected.
Book profits on 2012/2015 BTP steepeners
The steepening position recommended in late
November in the wake of the panic selling on shortdated
BTPs (the box versus Germany narrowed by
30bp in two weeks) worked quite well with the BTP
Feb 12/Apr 15 posting new highs this week (Chart 3).
With the 2015 part of the BTP curve becoming very
cheap versus the 2y and 10y, the risk/reward for BTP
steepeners is now very poor. After a more than
30bp move, we advise booking profits on
recommended steepeners.
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-4
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-8
2013/2014 btan richening
-10
Oct-10 Oct-10 Nov-10 Dec-10 Jan-11
Source: BNP Paribas
BTNS 07/14 ASW-NETHER 07/14 ASW-FRTR 10/20 ASW-NETHER 07/20 ASW
BTNS 7/13 ASW-NETHER 07/13 ASW-FRTR 10/20 ASW-NETHER 07/20 ASW
Chart 2: Sep 11 to Dec 12 CTZ/BTP Spreads:
Dec 12 CTZ Too Cheap
30
20
10
0
-10
-20
-30
Sep-11 Feb-12 Apr-12 Aug 12 vs July
12
Source: BNP Paribas
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40
30
20
10
Last
Dec-12
Chart 3: 2012/2015 BTP and BTP/Bund Box:
2012 BTPs’ Excessive Cheapness Corrected
0
90
Aug-10 Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Dec-10 Jan-11 Jan-11 Feb-11
Source: BNP Paribas
2012/2015 BTP/Bund box (LHS) BTP Feb 12/ Apr 15
150
140
130
120
110
100
Eric Oynoyan / Ioannis Sokos 13 January 2011
Market Mover, Non-Objective Research Section
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www.GlobalMarkets.bnpparibas.com