MARKET MOVER - BNP PARIBAS - Investment Services India

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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
GBP Curve Opportunities Update • Sterling curve: enter long reds vs. fronts and greens. Chart 1: June 11/June 12/June 13 Sterling Fly • GBP swap curve: keep here 2y/5y/10y GBP fly, 5y still has to normalise. • Cross spreads: Get ready to enter 5y/10y GBP/Eur compression trades. 45 30 15 0 GBP fly cheap vs. Dollar one Update on key GBP opportunities September sell-off provided a few opportunities on the GBP curve. We do an update here of the trades recommended recently. Short-Sterling curve: There has been a dramatic decoupling between the convexity of the Eurodollar curve and the Short-Sterling one. The box differential is back on the upper side of its range in the wake of the 20bp spike on the Sterling fly. The Latest BoE minutes highlighted the persistent downside risks on the UK economy, enhanced by massive and necessary public spending cuts. In such a context, the protracted BoE status quo is supportive for front/red Sterling flatteners while red/green spread should keep some premium as rate hikes will be gradually moved from 2011 into 2012. This should push back front/red/green flies towards August lows. In terms of RV, we found June 11/June 12/June 13 fly the most interesting one (10bp rolldown). We keep short positions entered at -4, would add at +1. Target: -18/-20. Stop loss: +5. GBP Swap curve: Two weeks ago, we highlighted the extreme expensiveness of the 5y given the shape of the money market curve. Nonetheless, the fly disinverted a bit while the steepening of the money market curve has been more pronounced, which has pushed the GBP 5y swap fly to more expensive levels around 3.5 standard deviations from fair value. In the past, we saw some flies temporarily reaching four standard deviations such as the Euro one on the Lehman collapse but the normalisation occurred in less than a quarter. So far it seems to be the best trade in terms of reward profile on the GBP swap curve with a potential of 30bp (see Chart 3).We entered 2/3 of the position and are ready to add the rest on a further overshoot. GBP/Eur 5y/10y swap box: That box is another way to play the expensiveness of 5y GBP. In contrast, to the Euro curve, the GBP 5y/10y segment has been remarkably stable in the mid-90s over the past six months. The GBP segment is too high vs. the Euro using the conditional distribution approach. We would -15 GBP fly expensive vs. Dollar one -30 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Source: BNP Paribas 45 35 25 15 5 -5 -15 -25 3/7/11 Sterling fly 3/7/11 Eurodollar fly Chart 2: Hedged GBP 2y/5y/10y swap fly Hedged GBP Swap Fly (1y/2y spread) 5y cheap 5y expensive -35 Dec-01 Apr-03 Sep-04 Jan-06 Jun-07 Oct-08 Mar-10 Source: BNP Paribas Chart 3: Distribution of GBP Fly vs. Short- Sterling Front/Red Spread 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 GBP swap 2/5/10 with GBP 2/6 between 48 & 58 h= 1.716 0 -20 -10 0 10 20 30 40 50 60 Source: BNP Paribas Peak at 14.4 Current level: -11.4 2009 regime enter compression trades on any spike to the 28/31bp area. Eric Oynoyan 23 September 2010 Market Mover, Non-Objective Research Section 31 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 and 26: EUR: Re-Enter Flatteners on 5y/10y
Page 27 and 28: EGBs: Market Update & Top Trade Ide
Page 29: EUR Covered Bonds: Market 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 (%
Page 69 and 70: Market Coverage Market Economics Pa

MARKET MOVER - BNP PARIBAS - Investment Services India

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