MARKET MOVER - BNP PARIBAS - Investment Services India

After an easing in ASW around July/August,
mainly due to the summer lull, the re-widening
trend observed since late August in the
peripheral markets needs to be differentiated. On
one hand, the iBoxx Ireland Covered index was at a
new high for the year (+20bp compared with early
July levels) at the time of writing, reflecting growing
concerns over the current situation, despite the fact
that the Irish government is now funded until the end
of H1 2011. Given that the risks perceived by
investors with relation to both the issuer and
sovereign bonds are the main drivers of ASW in
peripheral covered bonds, we expect further
widening as long as uncertainties over the banks’
situation prevail, and as long as the growth outlook
does not improve significantly.
With respect to Portuguese banks, the iBoxx
Portugal Covered index remains 20bp below early
July levels so far, despite a fiscal lag and
uncertainties weighing on the country. While
Portuguese covered bonds appear more resilient
than Irish covered bonds for the time being, we
expect more widening in ASW given the current
outlook, but also given the recent jump in reliance on
ECB funding by Portuguese banks.
Chart 4: Irish GILT 5Y ASW Now Equal to the
iBoxx Ireland Covered Index ASW
450
400
iBoxx € Ireland Covered Irish GILT 5Y
350
300
250
200
150
100
50
0
-50
-100
Jul 08 Jan 09 Jul 09 Jan 10 Jul 10
Source: BNP Paribas, iBoxx
And at a lesser extent:
2) BKIR 5Y is 46bp cheaper than Irish GILT 5Y, but
compared with historical data, BKIR/GILT 5Y ASW
differential should widen by at least 44bp.
On the other hand, as far as Spain and Italy are
concerned, the re-widening has been quite limited so
far (around +10bp from their trough in August) and
they are slightly below their levels early July. We
view this re-widening as a consequence of heavy
supply that needed to be digested by the market.
Once this is over, we expect some ASW
compression since the outlook in Spain and Italy has
improved and since the share of Spanish banks in
ECB funding has somewhat decreased.
Market abnormality
Because covered bonds tend to lag during spread
movements (compared to their respective banks
senior and government bonds) and because they are
less volatile, the jump in Irish GILT and PGB ASW
has not been followed yet by Irish and Portuguese
covered bonds in some cases. Looking at iBoxx
Portugal and Ireland Covered indices in comparison
with their corresponding govvies (Chart 3 and 4), we
are now in a situation where the govvies ASW has
reached the same level as that of the respective
iBoxx Covered index ASW. In the case of Portugal,
PGB ASW is even wider than the iBoxx Covered
index!
In particular, we have spotted the following distortion:
1) PGB 4y is 25bp cheaper than Caixa Geral de
Depositos (CXGD) Covered 4y! Looking at their
historical ASW differential, CXGD/PGB 4y should
widen by at least 55bp.
Camille de Courcel 23 September 2010
Market Mover, Non-Objective Research Section
30
www.GlobalMarkets.bnpparibas.com