MARKET MOVER - BNP PARIBAS - Investment Services India

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ECB Upcoming Tenders: How Much? • EUR 225bn is expiring next week and there is good reason to think that liquidity will drop from current levels. • However, the sources of demand at tenders that expire next week point to significant roll, especially on the 3mth the ECB will conduct. • STRATEGY: Enter ER1-ER5 steepening position. Chart 1: Large Expiry Ahead 1y MRO 6m 3m 35.67 1m 19.08 131.93 23.17 153.77 37.90 96.94 A very large expiry EUR 225bn is maturing next week: EUR 75.2bn from the second 1y tender the ECB carried out last year, EUR 17.9bn from the 6mth tender conducted in March and EUR 131.9bn from the 3mth tender conducted at the end of June. It is worth noting that the 3mth tender was conducted at the end of June and allowed banks to roll a significant part of the amount expiring from the first 1y tender (EUR442.2bn). The total amount expiring is very large and the current level of liquidity (EUR 591bn provided through the MRO and LTROs) is exposed to a decent decrease. However, looking at the source of demand at old tenders that expire next week, it seems that a large amount will be rolled. What can be expected for demand? A large part of the answer lies in the source of demand at the tenders that expire next week. The EUR 75.2bn 1y tender conducted in September 2009 did not attract arbitrage as the 12mth eonia at that time was 0.69%, well below the refi rate. Demand therefore came largely from banks with little access to the market for long-term liquidity. It is reasonable to think that at least EUR 50bn will be rolled of the EUR 75.2bn expiring. When it comes to the EUR 17.9bn from the 6mth tender (conducted at the start of April), it is interesting to note that liquidity provided in April 2010 with LTROs by the Bank of Greece to banks based in Greece increased by EUR 18bn. It is crystal clear that the EUR 17.9bn is in Greece and there is a good chance of seeing Greek banks rolling almost all the amount expiring. Finally, the bulk of next week’s expiry (EUR 131.9bn) comes from the 3mth tender the ECB conducted on 1 July, the day of the expiry of the famous EUR 442.2bn tender. At that time, liquidity fell sharply as arbitrage disappeared, and demand for the 3mth came when the 3mth Euribor was at 0.78% and the 3mth eonia at 0.47%. Once again, it is worth noting that despite the fall in liquidity, the level of liquidity provided by the Bank of Greece in July thanks to the LTRO was unchanged 17.88 Maturity (days) 75.24 -20 0 20 40 60 80 100 120 Source: BNP Paribas from June. This means that Greek banks rolled the expiry of the 1y with the 3mth. LTROs in Ireland fell almost EUR 20bn in July from June after increasing by EUR 40bn in June 2009, suggesting that demand from Irish banks at the 3mth tender in July was a floor. Given the level of the 3mth Euribor and the 3mth eonia starting on 30 September, respectively 0.90% and 0.54%, it makes sense to see relatively firm demand as the cost of ECB liquidity is relatively cheaper than it was three months ago. Against this backdrop, we see a very large roll of the 3mth expiry, well above EUR 100bn. As a result, we expect total demand at next week’s tenders of around EUR 190bn. Two ECB tenders will offer banks the opportunity to be allotted. The ECB will conduct a fine-tuning, short-term 6day tender to allow banks to find liquidity until the next MRO. Given the evolution of demand at the MRO over many weeks, it appears that demand for short-term liquidity is roughly stable in the EUR 150-155bn area. Needs for short-term liquidity are unlikely to increase next week and we therefore expect the 6day tender will attract only moderate demand. Demand at the 3mth will therefore be very strong. As a result, with no change in demand at the MRO, we expect demand for next week’s 3mth tender could be in the EUR 165bn area and demand at the 6day close to EUR 25bn. This would lead to a EUR 35bn drop in liquidity. Given the current level of excess liquidity, just below EUR 100bn, a drop of EUR 35bn should not lead to significant upward pressures on short-term rates. Moreover, the extension of nonstandard procedures for open market operations means that there is no rush for very short-term liquidity. Eonia should remain close to current lows. This may favour limited resteepening pressures beyond the 3mth area. Strategy: Enter ER1-ER5 steepening position. Patrick Jacq 23 September 2010 Market Mover, Non-Objective Research Section 26 www.GlobalMarkets.bnpparibas.com
EGBs: Market Update & Top Trade Ideas • Greece is outperforming across peripherals, Portugal and Ireland are breaking new wides while Spain and Italy are more resilient than in the past widening episodes. • This 3-speed Europe’s periphery has been with us for over a month now and could persist for the coming months. • STRATEGY: Italy remains our favourite pick among the eurozone periphery. We believe the Greek curve’s steepening could continue in the near term. On a risk/return framework, we find Irish Gilts more attractive than PGBs at current levels. The way peripheral Europe trades has changed fundamentally over the past few weeks. We are not used to seeing Greece outperforming versus the rest of the periphery while Ireland and Portugal are breaking new wides every day. For the first time, Greece is actually feeling the protection of the EU/IMF mechanism while the market’s focus has shifted towards the other two small peripheral countries, i.e. Ireland and Portugal. Spain has been trading like Italy since the release of the stress test results in July and this has led to a 3-speed periphery of (i) Greece, (ii) Portugal and Ireland and (iii) Italy and Spain. Chart 1 clearly illustrates this point, showing the changes in ASW since the beginning of September. Starting with Greece, the massive steepening move in 1/2s and 2/10s has continued in the last few weeks. The disbursement of the second tranche of the EU/IMF package has been a catalyst for the rally in the 2011 GGBs. Beyond that, some positive rhetoric from EU authorities and a bit of praise for the tough decisions and the degree of fiscal consolidation that the Greek government has achieved in the first eight months of the year have pushed Greek spreads lower. Of course, we have to treat this compression with a pinch of salt as it is taking place in very thin markets. It will take longer to convince investors that Greece can actually avoid default or restructuring. Irrespective of this, and in line with the IMF wording, Greece has made a strong start on its programme and has slowly started being rewarded for this in terms of spreads behaviour, especially at the front end. Chart 2 shows the change in Greek yields across the curve in September. Continuing with Ireland and Portugal, we saw a significant widening ahead of their auctions in the past week. A combination of negative sentiment Chart 1: 3-Speed Europe’s Periphery in Sep. 100 50 0 -50 -100 -150 -200 -250 Source: BNP Paribas ASW Changes of Peripheral Spread in September 2y 5y 10y 30y Chart 2: The Steepening of the Greek Curve Source: BNP Paribas GRE ITA SPA POR Chart 3: POR & IRE Underperformance in Sep. 70 60 50 40 30 20 10 50 0 -50 -100 -150 -200 -250 -300 -350 -400 -450 3- 2011 8- 2011 Changes in ASW in September POR 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Source: BNP Paribas GGBs Yields Change in September 2012 GGBs Following the Rally 2011 GGBs Massive Rally 5- 2012 5- 2013 1- 2014 8- 2014 8- 2015 Longer-end is more resilient to the compression move 4- 2017 7- 2018 10- 2019 10- 2022 3- 2026 towards peripherals and the upcoming auctions amplified the usual pre-auction widening that we see in smaller peripherals. Chart 3 shows the widening and the flattening that we have seen on both Irish and Portuguese curves in September so far. 2013/14 maturity bonds have suffered most of the widening while the longer end has been the most resilient. After the auction, we witnessed a short-lived correction in both countries but this was not enough to pare back the widening of the last weeks. IRE IRE 9- 2040 Ioannis Sokos 23 September 2010 Market Mover, Non-Objective Research Section 27 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Euromoney Interest Rates Survey 201
Page 3 and 4: ECB on a different page… …but i
Page 5 and 6: developments and is prepared to pro
Page 7 and 8: and property tax payments, dropped
Page 9 and 10: directly to effect outright purchas
Page 11 and 12: Services also on the slide The ‘f
Page 13 and 14: inflation rate is calculated exclud
Page 15 and 16: closer to a more normal level” to
Page 17 and 18: point advance in the June Tankan. P
Page 19 and 20: US: Belly of the Curve is Rich, but
Page 21 and 22: US: A Carry Trade with Extra Potent
Page 23 and 24: MBS: Remain Underweight, GNM CBRs U
Page 25: EUR: Re-Enter Flatteners on 5y/10y
Page 29 and 30: EUR Covered Bonds: Market Update
Page 31 and 32: GBP Curve Opportunities Update •
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
Page 37 and 38: Table 1: BNP Paribas Carry Analysis
Page 39 and 40: have been happy to buy the roll to
Page 41 and 42: Technical Analysis - Interest Rates
Page 43 and 44: Trade Reviews Options, Money Market
Page 45 and 46: ond market attracted huge swathes o
Page 47 and 48: warning to Greek banks that it migh
Page 49 and 50: Chart 2: EUR/SEK - major support be
Page 51 and 52: Economic Calendar: 24 Sep - 1 Oct G
Page 53 and 54: Economic Calendar: 24 Sep - 1 Oct (
Page 55 and 56: Key Data Preview Chart 3: US ISM Po
Page 57 and 58: Key Data Preview Chart 7: US Consum
Page 59 and 60: Key Data Preview Chart 11: Japanese
Page 61 and 62: Key Data Preview Chart 7: UK CIPS M
Page 63 and 64: Economic Calendar: 4 - 29 October 4
Page 65 and 66: Next week's T-Bills Supply Date Cou
Page 67 and 68: Economic Forecasts GDP Year 2010 (%
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MARKET MOVER - BNP PARIBAS - Investment Services India

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