MARKET MOVER - BNP PARIBAS - Investment Services India

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Inflation: Bring QE to Europe! • GLOBAL: Mixed reception to dovish CBs • EUR: Stay Negative. Keep long EUR/FRF. • USD: Volatile. Low RY. 5/10y BE flattener. • GBP: Correction in the Gilt rally. 1y rich. GLOBAL: Central bank rhetoric from the US and UK remains very dovish. The FOMC is “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate”. This has fuelled a rally in bonds although equities are weaker following their initial positive reaction. Commodities have not benefited hugely from USD weakness given struggling risk appetite although enhanced liquidity should help asset and commodity markets to perform. Real yields offer more protection from a depreciating currency and the inflationary impact of quantitative easing. Indeed, US real yields have rallied by 30bp in a couple of sessions. Between 9 and 23 March 2009 – the onset of QE – we also saw a tremendous rally in real yields and breakevens did not suffer much as TIPS were included in the programme whilst BEs rose in the eventual yield sell-off – Chart 1. The UK issued 550mn UKTi-27 via mini-tender whilst Tesoro will reopen BTPei-21 for up to EUR 1.5bn. Breakevens suffered elsewhere and we continue to find EUR and especially FRF breakevens rich and exposed here. EUR: Core/peripheral spreads generally remain under widening pressure, causing disparity in linker/breakeven performance. BTPeis breakevens have outperformed core linkers at the front end but have underperformed materially at 7-15y maturities with real spreads widening much more than nominal ones. Supply is partly to blame, with 7y+ BTPeis suffering on the announcement of EUR 1.5bn BTPei- 21 supply next week. Whilst the BTPei-21 has underperformed vs. OATei, it has outperformed vs. BTPei-23. The BTPei-21 may look attractive in the inflation and ASW discount curve, but it is hit by the richness of its nominal (BTP Mar-21 and the cheapness of BTP Aug-23, nominal comparator for BTPei-23). After adjusting for this, we find the BTPei- 21 no longer looks cheap vs. either OATei or BTPei curves and we expect a further concession – both outright and in relative terms ahead of its auction on Tuesday 28 September. BTPei-21 offers amongst the highest real ASW on the curve, whilst the bond does have a closer-to-money inflation floor. OATi breakevens are underperforming their EUR counterparts sharply at the front end, as we called for. Our long OBLei-13/short OATi-13 BE spread has moved above -40bp from -45bp mid last Friday – Chart 1: 10y USD RY, NY & BE into/out of QEI 2.50 2.30 2.10 1.90 1.70 1.50 23-Mar 1.30 3.00 1.10 0.90 10y USD Generic Real Yield 2.50 10y USD Generic Breakeven 0.70 06-Mar 10y USD Generic Tsy Yield, Rhs 0.50 2.00 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Chart 2: Long OBLei-13/Short OATi-13 BE Spd 0 -10 -20 -30 -40 -50 -60 BOBLEI13 / OATI13 Breakeven EUR_HICP / FRF_CPI m/m (0m lag) Rhs -70 -2.0 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 All Charts Source: Bloomberg, BNP Paribas Chart 2. To recap, cumulative inflation (from Aug- Dec) is expected at 1.30% in EUR compared to 0.75% in FRF and this is not priced with forwards below the 18m range. We see further potential in this trade. USD: Strong rally in real yields post FOMC meeting although the move is retracing fast on breakevens. Market felt squeezed (although dealers reported long on 9-Sep) with 10y real yields at all-time lows and no supply until end-Oct. Still, Next FOMC is in 6 weeks and our models find TIPS BEs expensive with poor seasonals and mixed total return breakevens dynamics in Q4. Meanwhile, Barcap US Agg Index story should still add some vol. We expect news from Friday evening but all depends on the index sponsor, which is said to be active in the market. Overall we have no strong opinion near term but are not keen to short US BEs and expect volatility ahead. We continue to find the 5y area cheap and 20y area rich. GBP: Breakevens down sharply (10bp) in the strong gilt rally. GBP 550mn UKTi-27 mini-tender did not help although it was digested smoothly (2.2 bid/cover) after concession pre-tender. Real yields are close to their lower bound and BEs will continue to experience increased sensitivity to conventionals if real yields stay this low. We still like selling 1y inflation swap with a hedge against Dec-10 RPI (via UKTi-11) and early BoE rate hikes (via the money market). 5.00 4.50 4.00 3.50 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 Shahid Ladha / Herve Cros 23 September 2010 Market Mover, Non-Objective Research Section 36 www.GlobalMarkets.bnpparibas.com
Table 1: BNP Paribas Carry Analysis EUR Pricing Date 23-Sep-10 Term 1 Term 2 3m 6m 12m Repo Rate 0.47% 0.51% 0.58% 0.70% 0.87% EUR DRI 109.34900 109.54000 109.79265 110.12671 109.81139 110.88334 FRF DRI 119.71400 119.97000 119.85339 119.94133 119.88290 121.17136 Sett. Date 28-Sep-10 01-Nov-10 01-Dec-10 28-Dec-10 28-Mar-11 28-Sep-11 Real BE Real BE Real BE Real BE Real BE Real BE OATEI Jul-12 -0.99% 1.68% 2.2 0.8 8.5 6.4 20.0 18.3 -32.3 -31.0 -56.8 -22.0 BTPEI Sep-12 0.12% 1.76% 7.7 0.6 19.0 5.7 35.0 16.3 9.3 -30.1 67.8 -33.0 BOBLEI Apr-13 -0.40% 1.12% 3.9 2.8 10.6 8.7 20.7 18.9 -6.3 -6.8 7.8 20.0 BTPEI Sep-14 1.01% 1.52% 6.1 0.6 13.6 3.2 23.0 8.5 17.5 -11.8 54.5 -9.2 OATEI Jul-15 0.05% 1.54% 3.0 0.5 7.2 2.6 13.0 6.8 2.3 -9.3 15.7 -5.8 BUNDEI Apr-16 0.10% 1.43% 2.7 0.6 6.4 2.6 11.5 6.4 2.5 -6.8 14.1 -2.6 BTPEI Sep-17 1.72% 1.54% 4.6 0.1 9.9 1.4 16.1 4.2 15.7 -8.0 40.9 -7.8 BTPEI Sep-19 2.05% 1.65% 4.1 -0.1 8.6 0.8 13.9 3.0 14.5 -7.0 36.2 -7.0 BUNDEI Apr-20 0.61% 1.62% 2.2 0.1 4.9 1.0 8.3 3.0 4.5 -5.5 14.3 -4.6 OATEI Jul-20 0.85% 1.80% 2.4 -0.1 5.3 0.6 8.9 2.5 5.8 -6.7 17.4 -7.0 BTPEI Sep-21 2.29% 1.60% 3.6 -0.2 7.6 0.4 12.1 2.1 13.2 -6.4 32.1 -7.2 OATEI Jul-22 1.04% 1.72% 2.1 -0.4 4.6 0.0 7.6 1.3 5.5 -6.7 15.5 -8.2 RFFEI Feb-23 1.42% 1.51% 2.5 0.2 5.4 1.2 8.8 3.0 7.7 -3.4 19.8 -2.0 BTPEI Sep-23 2.44% 1.77% 3.3 -0.3 6.9 0.1 11.0 1.5 12.4 -6.5 29.6 -8.4 GGBEI Jul-25 8.49% 1.57% 8.9 -1.8 17.5 -2.6 26.3 -2.4 42.7 -15.2 94.7 -23.4 GGBEI Jul-30 7.14% 3.09% 5.9 -4.5 11.8 -8.1 17.7 -10.5 27.7 -29.5 61.1 -55.0 OATEI Jul-32 1.23% 2.00% 1.5 -0.4 3.2 -0.2 5.3 0.5 4.2 -4.9 11.1 -6.6 BTPEI Sep-35 2.37% 2.38% 1.9 -0.9 4.0 -1.4 6.3 -1.2 6.9 -7.8 16.2 -13.1 OATEI Jul-40 1.26% 2.04% 1.1 -0.4 2.3 -0.4 3.8 0.0 3.0 -4.3 7.9 -6.1 BTPEI Sep-41 2.69% 2.13% 1.8 -0.8 3.8 -1.1 6.0 -0.9 6.9 -6.6 15.9 -10.7 FRF OATI Jul-11 -1.01% 1.50% 9.5 9.2 -24.7 -23.5 -36.5 -28.6 -214.6 -73.5 - - OATI Jul-13 -0.54% 1.48% 4.3 2.4 -3.0 -6.3 -3.7 -7.7 -21.0 -27.0 -10.9 -15.5 OATI Jul-17 0.28% 1.82% 2.9 0.3 1.0 -3.8 1.8 -4.9 -1.2 -14.0 11.0 -13.6 OATI Jul-19 0.58% 1.90% 2.7 0.1 1.4 -3.4 2.3 -4.4 1.0 -11.9 12.4 -12.5 OATI Jul-23 0.92% 2.01% 2.2 -0.1 1.6 -2.6 2.4 -3.4 2.2 -8.9 12.1 -9.8 OATI Jul-29 1.09% 2.10% 1.8 -0.2 1.4 -2.3 2.1 -3.1 2.3 -7.9 10.3 -9.2 USD Pricing Date 23-Sep-10 Term 1 Term 2 3m 6m 12m Repo Rate 0.20% 0.20% 0.21% 0.23% 0.27% USD DRI 218.00027 218.31200 218.71229 219.22253 219.73273 222.12726 Sett. Date 24-Sep-10 01-Nov-10 01-Dec-10 24-Dec-10 24-Mar-11 26-Sep-11 Yield BE Real BE Real BE Real BE Real BE Real BE TIPS Jan-11 0.24% -0.07% 71.6 73.5 271.2 277.0 945.6 964.8 - TIPS Apr-11 -0.01% 0.24% 26.8 26.3 77.5 76.5 164.3 163.4 - - - - TIPS Jan-12 -0.27% 0.60% 7.9 7.0 21.6 19.7 42.3 39.9 68.1 63.1 450.4 438.2 TIPS Apr-12 -0.27% 0.60% 6.6 5.7 17.6 15.8 33.9 31.7 52.0 47.3 245.0 235.5 TIPS Jul-12 -0.44% 0.80% 4.5 3.6 13.0 11.3 26.1 23.8 35.8 31.2 147.9 138.3 TIPS Apr-13 -0.43% 0.95% 3.1 1.8 8.8 6.3 17.3 14.0 22.5 15.5 75.4 59.8 TIPS Jul-13 -0.34% 0.92% 3.3 1.8 8.8 6.0 16.9 13.2 22.6 14.9 71.7 54.2 TIPS Jan-14 -0.17% 0.93% 3.4 1.5 8.5 5.0 15.7 11.0 21.8 12.1 64.3 42.2 TIPS Apr-14 -0.19% 1.04% 3.0 1.0 7.6 4.0 14.1 9.2 19.4 9.1 56.3 33.2 TIPS Jul-14 -0.11% 1.03% 3.1 1.0 7.7 3.8 13.9 8.8 19.5 8.7 55.1 30.8 TIPS Jan-15 0.06% 1.06% 3.1 0.8 7.5 3.2 13.3 7.4 19.2 7.0 52.2 25.0 TIPS Apr-15 -0.07% 1.26% 2.6 0.2 6.4 2.0 11.5 5.6 16.0 3.7 43.5 16.6 TIPS Jul-15 0.09% 1.17% 2.9 0.4 6.9 2.4 12.1 6.0 17.5 4.9 46.4 18.6 TIPS Jan-16 0.20% 1.22% 2.9 0.2 6.7 1.9 11.5 5.1 16.9 3.6 44.0 14.7 TIPS Jul-16 0.20% 1.36% 2.7 -0.1 6.2 1.2 10.7 4.0 15.6 1.9 40.2 10.2 TIPS Jan-17 0.35% 1.39% 2.7 -0.1 6.2 1.0 10.5 3.5 15.7 1.4 39.5 8.4 TIPS Jul-17 0.34% 1.52% 2.5 -0.4 5.7 0.5 9.8 2.7 14.5 0.0 36.3 5.0 TIPS Jan-18 0.43% 1.56% 2.4 -0.4 5.5 0.3 9.2 2.3 13.8 -0.4 34.2 3.7 TIPS Jul-18 0.45% 1.66% 2.3 -0.6 5.1 -0.1 8.6 1.5 13.0 -1.5 31.8 0.8 TIPS Jan-19 0.56% 1.70% 2.4 -0.5 5.2 0.0 8.7 1.7 13.3 -1.0 32.2 1.8 TIPS Jul-19 0.60% 1.78% 2.3 -0.7 5.0 -0.3 8.3 1.1 12.7 -2.0 30.5 -0.6 TIPS Jan-20 0.66% 1.76% 2.2 -0.8 4.8 -0.6 7.9 0.7 12.2 -2.5 29.1 -1.7 TIPS Jul-20 0.72% 1.77% 2.1 -0.8 4.6 -0.6 7.6 0.5 11.8 -2.6 28.1 -2.2 TIPS Jan-25 1.15% 1.89% 2.0 -1.0 4.1 -1.2 6.6 -0.6 10.5 -4.0 24.2 -6.3 TIPS Jan-26 1.20% 1.93% 1.9 -0.9 3.9 -1.2 6.2 -0.6 9.9 -3.8 22.7 -5.9 TIPS Jan-27 1.25% 1.92% 1.8 -0.9 3.8 -1.1 6.0 -0.6 9.7 -3.7 22.2 -5.8 TIPS Jan-28 1.28% 1.96% 1.7 -1.0 3.5 -1.4 5.6 -1.0 9.0 -4.3 20.5 -6.9 TIPS Apr-28 1.33% 1.97% 1.9 -0.7 4.0 -0.8 6.2 -0.2 10.1 -2.7 22.9 -3.8 TIPS Jan-29 1.30% 2.04% 1.7 -0.9 3.6 -1.1 5.6 -0.6 9.1 -3.5 20.6 -5.6 TIPS Apr-29 1.37% 1.97% 1.9 -0.7 3.9 -0.8 6.1 -0.2 9.9 -2.7 22.4 -3.8 TIPS Apr-32 1.39% 2.04% 1.6 -0.9 3.4 -1.1 5.3 -0.7 8.6 -3.6 19.3 -5.8 TIPS Feb-40 1.54% 2.15% 1.3 -0.9 2.6 -1.2 4.0 -1.1 6.6 -3.7 14.7 -6.5 GBP Pricing Date 23-Sep-10 Term 1 Term 2 3m 6m 12m Repo Rate 0.55% 0.55% 0.55% 0.61% 0.70% Sett. Date 24-Sep-10 01-Nov-10 01-Dec-10 24-Dec-10 24-Mar-11 26-Sep-11 Yield BE Real BE Real BE Real BE Real BE Real BE UKTi Aug-11 -0.33% 0.82% 9.2 10.9 52.7 56.7 79.7 87.0 - - - - UKTi Aug-13 -1.63% 2.53% -2.2 -3.9 5.3 2.3 7.8 3.7 7.8 -0.1 12.5 -1.8 UKTi Jul-16 -0.30% 2.41% 1.4 -1.7 7.3 1.6 10.2 2.5 16.8 1.4 34.7 2.6 UKTi Nov-17 -0.07% 2.60% 4.2 0.8 5.0 -1.0 8.8 0.7 16.1 -0.3 31.7 -2.1 UKTi Apr-20 0.30% 2.66% 1.7 -1.6 6.0 0.0 8.2 0.2 14.1 -2.1 28.3 -4.8 UKTi Nov-22 0.53% 2.73% 3.2 0.1 4.2 -1.5 6.8 -0.7 12.6 -2.5 24.7 -6.1 UKTi Jul-24 0.60% 2.93% 1.4 -1.5 4.7 -0.6 6.5 -0.7 11.2 -3.1 22.4 -6.6 UKTi Nov-27 0.66% 3.06% 2.3 -0.4 3.1 -1.8 5.0 -1.5 9.3 -3.7 17.9 -8.5 UKTi Jul-30 0.60% 3.29% 1.1 -1.3 3.7 -0.7 5.1 -0.8 8.8 -2.9 17.4 -6.3 UKTi Nov-32 0.64% 3.26% 1.8 -0.6 2.4 -2.0 3.9 -2.0 7.2 -4.5 13.9 -9.9 UKTi Jan-35 0.62% 3.35% 0.9 -1.4 2.8 -1.3 3.9 -1.7 6.6 -4.3 13.1 -8.9 UKTi Nov-37 0.59% 3.38% 1.5 -0.7 2.0 -2.0 3.2 -2.1 5.9 -4.6 11.2 -10.1 UKTi Mar-40 0.61% 3.38% 1.3 -0.8 1.7 -2.1 2.8 -2.3 5.2 -5.1 9.8 -10.7 UKTi Nov-42 0.58% 3.41% 1.2 -0.8 1.6 -2.1 2.6 -2.3 4.7 -5.0 9.0 -10.7 UKTi Nov-47 0.54% 3.46% 1.1 -0.9 1.4 -2.1 2.3 -2.3 4.2 -5.0 7.9 -10.5 UKTi Mar-50 0.54% 3.46% 1.0 -0.9 1.3 -2.1 2.1 -2.4 3.8 -5.0 7.1 -10.6 UKTi Nov-55 0.50% 3.48% 0.9 -0.8 1.2 -1.9 2.0 -2.2 3.7 -4.6 7.0 -9.6 JPY Pricing Date 23-Sep-10 Term 1 Term 2 3m 6m 12m Repo Rate 0.12% 0.12% 0.12% 0.13% 0.14% JPY DRI 99.120 99.100 99.200 99.432 98.752 98.600 Sett. Date 28-Sep-10 10-Nov-10 10-Dec-10 28-Dec-10 28-Mar-11 28-Sep-11 Yield BE Yield BE Yield BE Real BE Real BE Real BE JGBI-1 Mar-14 1.07% -0.89% 3.3 3.1 9.0 8.7 17.1 16.7 5.8 4.9 17.7 16.1 JGBI-2 Jun-14 1.22% -1.03% 3.7 3.4 9.4 9.0 17.1 16.6 8.0 6.8 22.1 19.9 JGBI-3 Dec-14 1.11% -0.87% 2.9 2.5 7.6 7.0 14.1 13.4 5.2 3.6 14.8 11.5 JGBI-4 Jun-15 1.21% -0.94% 2.8 2.4 7.2 6.5 15.4 14.5 5.9 4.0 15.8 11.9 JGBI-5 Sep-15 1.17% -0.88% 2.5 2.1 6.6 5.9 12.2 11.3 4.9 3.1 13.5 9.6 JGBI-6 Dec-15 1.10% -0.79% 2.3 1.9 6.1 5.3 11.3 10.4 4.0 2.0 11.1 7.0 JGBI-7 Mar-16 1.19% -0.86% 2.3 1.9 6.1 5.3 11.2 10.1 4.7 2.5 12.6 8.0 JGBI-8 Jun-16 1.30% -0.94% 2.6 2.0 6.3 5.4 11.3 10.2 5.7 3.3 14.5 9.5 JGBI-9 Sep-16 1.28% -0.90% 2.3 1.8 5.9 5.0 10.7 9.6 5.2 2.7 13.4 8.2 JGBI-10 Dec-16 1.27% -0.85% 2.3 1.7 5.7 4.7 10.3 9.0 4.9 2.2 12.4 6.8 JGBI-11 Mar-17 1.31% -0.87% 2.2 1.6 5.6 4.5 10.0 8.7 5.0 2.2 12.6 6.8 JGBI-12 Jun-17 1.37% -0.90% 2.3 1.7 5.7 4.5 10.0 8.5 3.7 0.8 13.4 7.1 JGBI-13 Sep-17 1.33% -0.82% 2.1 1.4 5.3 4.1 9.4 7.9 4.8 1.7 12.1 5.4 JGBI-14 Dec-17 1.33% -0.78% 2.1 1.3 5.2 3.9 9.1 7.5 4.7 1.3 11.6 4.6 JGBI-15 Mar-18 1.37% -0.78% 2.0 1.3 5.0 3.7 9.0 7.3 4.7 1.3 11.7 4.4 JGBI-16 June-18 1.48% -0.85% 2.2 1.4 5.3 3.9 9.2 7.4 5.4 1.8 13.1 5.3 Source: BNP Paribas Shahid Ladha / Herve Cros 23 September 2010 Market Mover, Non-Objective Research Section 37 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 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: Table 3: BNP Paribas' Inflation For
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

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