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

Update on FIN SEN and FIN SUB 5/10y
The sharp sell-off in banks’ single-names has
triggered 4-5bp of flattening in 5/10s and has
impacted indices’ curves to a similar extent. Looking
at the relationship ‘curve vs. outright’ suggests much
more downside in FIN SEN and SUB curves, even
negative values. Actually, the downside is for us
much more limited and 5/10 curves are very unlikely
to break +3bp. Note that in each occasion the on-therun
5y SEN traded around 150 – that was at end Apr-
09 in s11 and mid Dec-08 in s10 - the 5/10y curve
traded in the [+2; +3] range.
What’s the call?
We have been right to call for the flattening of
SEN and SUB 5/10 curves but we see now the
downside at +4 in SEN and +3 in SUB extremely
limited.
Current levels are bang in line with previous “crisis”
levels but given the better visibility the market has on
both single-names and macro-economic
environment, we do expect some kind of
normalization in the foreseeable future. In this
context, 5/10 SEN and SUB present extremely
limited downside and the steepeners could now
be seen as good carry plays. In s13, 5/10 SEN and
SUB are generating 1.7bp and 2.5bp of positive carry
per month.
Update on XO 5/10y
We have been pushing the steepener in XO s12 and
s13 at the end of March, at +18 and +25bp. We are
now back to our entry levels but continue to see
some juice in these 2 trades. Should XO keep on
widening, we could see those curves flatten
marginally but the positive carry (monthly breakevens
of 5.1bp for s12 and 6.3bp for s13) and the
fundamental developments on the constituents of the
s12 and 13 baskets remain very supportive for the
steepeners.
Chart 9: Curves’ Levels and Changes
5y 5/10y 1W Chg 1M Chg
MAIN s13 109 10 -2 -4
MAIN s12 105 16 -0 -2
SEN s13 153 4 -3 -6
SEN s12 149 12 - -1
SUB s13 225 3 -2 -6
SUB s12 221 10 - -3
HVL s13 151 15 -5 -5
HVL s12 141 25 - -
XO s13 502 15 -5 -
XO s12 466 30 - +5
Chart 10: 5/10y vs. 5y Outright in MAIN s12
5/10y
23
21
19
17
15
13
11
9
7
5/10Y MAIN (lhs)
5Y MAIN (rhs inverted)
5
09/09 10/09 11/09 12/09 01/10 02/10 03/10 04/10
60
65
70
75
80
85
90
95
100
105
110
Chart 11: 5/10y vs. 5y Outright in FIN SEN s12
5/10y
20
15
60
70
80
10
90
5
100
-
110
-5
5/10Y FIN SEN (lhs)
120
5Y FIN SEN (rhs inverted)
130
-10
140
-15
150
9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10
5y
5y
Source: BNP Paribas
Pierre Yves Bretonniere 7 May 2010
Market Mover Non-Objective Research Section
57
www.GlobalMarkets.bnpparibas.com