MARKET MOVER - BNP PARIBAS - Investment Services India

JGBs: 7y/10y Box
• The 10y ASW cheapened the most during
the rally last month.
• STRATEGY: We recommend being long 10y
ASW against the 7y ASW as a tactical trade.
Chart 1: ASW Difference from 1m Average (bp)
1.5
1m High
1.0
0.5
0.0
FX intervention and BoJ meeting
The yen has returned close to its all-time high versus
the US dollar amid concerns that the US might be
downgraded. The US debt ceiling deadlock has been
resolved, but the economic outlook is becoming
increasingly uncertain. The Ministry of Finance
staged yen-selling intervention in the FX market on
the morning of 4 August and the 10y JGB yield broke
below 1% on expectations of additional easing after
the Bank of Japan's announcement that its next
Monetary Policy Meeting – originally scheduled for
4-5 August – would instead conclude in the afternoon
of 4 August.
After the meeting, the BoJ announced that it deemed
it necessary to further enhance monetary easing,
thereby ensuring a successful transition from the
recovery phase – following the earthquake – to a
sustainable growth path with price stability. The BoJ
increased the total amount of the asset purchase
programme from JPY 40trn to JPY 50trn (an increase
of JPY 5trn for the asset purchase fund and JPY 5trn
for 6m fixed rate operations). However, the JGB
market was disappointed by the decision as some
participants expected further decisive measures such
as a rate cut and extending duration in the BoJ’s
JGB-buying operations.
Now, the JGB 10y sector looks much cheaper as
investors took profit at the sub-1% level. However,
with many investors somewhat behind in their
FY2011 bond-buying plans, we expect JGB yields to
continue to test the downside unless the US and
European markets rapidly move out of a risk-off
mode.
7y/10y box
We recommend a 7y/10y box as a tactical trade. 10y
ASW looks cheap on the curve at around 0bp
especially against the futures sector. Also, we think
that the 10y and 20y sectors may find support from
ASW flows especially if the 5y JGB yield declines
further from current levels. 6m Libor is only 3bp
below the 5y JGB yield. Domestic investors may find
ASW attractive as a carry position above the 0bp
level.
-0.5
-1.0
-1.5
-2.0
1m Low
JB280
JB281
JS97
JB282
JB283
JB284
JB285
JB286
JB287
JB288
JB289
JB290
JB291
JB292
JB293
JB294
JB295
JB296
JB297
JB298
JB299
JB300
JB301
JB302
JB303
JB304
JB305
JB306
JB307
JB308
JB309
JB310
JB311
JB312
JB313
JB314
JB315
Source: BNP Paribas
5
0
-5
-10
-15
-20
Chart 2: JGB 7y/10y Box (bp)
Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Source: BNP Paribas
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-0.25
-0.50
(%)
5yr JGB
7y 10y 7y/10y box (RHS)
Chart 3: JGB 5y and ASW Carry
20yr ASW (RHS)
Target Entry: 7.5bp (JB296 versus JB316)
Profit Take: 2.5bp
Stop Loss: 10bp
15.0
12.5
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
60
(bp)
-0.75
-40
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11
Source: BNP Paribas
20yr ASW Carry
( = 6M Libor + x )
3M Tibor
100
80
40
20
0
-20
Tomohisa Fujiki / Masahiro Kikuchi 4 August 2011
Market Mover, Non-Objective Research Section
44
www.GlobalMarkets.bnpparibas.com