MARKET MOVER - BNP PARIBAS - Investment Services India

Europe ITraxx Credit Indices
• XO/MAIN: we advise to take profit on the
compression trade we recommended last week;
more than 20bp gain. Compression will remain a
major theme in the coming months and we are
now waiting for a better entry level to re-position
it.
• SUB/SEN: the more mixed picture in Bank
Capital instruments –T1 being the sole
exception– should trigger the underperformance
of FIN SUB. Given the recent collapse of the
SUB/SEN ratio, we think it makes sense to take
profit on our compression trade “long risk FIN
SUB / Short risk FIN SEN x1.5” even if further
pressure on GIIPS could further compress the
ratio. Net gain on the trade: 11bp.
• MAIN/CDX: the increase in GIIPS sovereign
risk and decrease in concerns of a double-dip
scenario are making iTraxx MAIN unlikely to
outperform CDX IG. Our trade “long Europe /
short US” which is back to entry level will be
closed as soon as MAIN has retraced from
current oversold levels.
• MAIN 5/10y: the 5/10y is now too steep vs.
the 5y and the forward is very toppish; we
advise to buy the 5y in 5y. Entry levels: 10y:
129; 5y: 119.
• MAIN 3/5y: the 3/5y is steep vs. the 5y and
the forward is high but it has not reached a nobrainer
level. We stay away for now.
• XO 5/10y: we take profit on our 5/10y
steepener in s13 which trades now too steep
given the level of the 5y. The total P&L of the
trade, including carry, is equivalent to a
steepening of 20bp.
Chart 1: 1m correlation MAIN vs. SOVX
120%
100%
80%
60%
40%
20%
0%
-20%
-40%
-60%
-80%
9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10 8/10 9/10
Source: BNP Paribas
Correl 1m MAIN / SOVX
Chart 2: XO – 4x MAIN history
300
250
200
150
100
-
50
3/10 4/10 4/10 5/10 5/10 6/10 6/10 7/10 7/10 7/10 8/10 8/10 9/10
Source: BNP Paribas
iTraxx s12: XO - 4 x MAIN
Q1 (6m)
Median (6m)
Q3 (6m)
Chart 3: SUB -1.5x FIN SEN history
30
25
20
15
10
iTraxx s12: SUB - 1.5 x SEN
Q1 (6m)
Median (6m)
Q3 (6m)
XO Tight
XO Wide
SUB Wide
5
Update on Pair-trades:
XO/MAIN:
The compression trend between the High-Yield and
High-Grade cash markets somewhat halted this
week in the context of 1/ still relatively active primary
markets and 2/ end-accounts unwilling to put their
cash into secondary markets. Even in Bank Capital,
flows between buyers and sellers have been more
balanced. On a weekly basis, the BoA-ML High-Yield
index is only tighter by 6bp against the iBoxx High-
Grade Non-financials index wider by 1bp.
-
-5
-10
-15
3/10 4/10 4/10 5/10 5/10 6/10 6/10 7/10 7/10 7/10 8/10 8/10 9/10
Source: BNP Paribas
SUB Tight
In contrast, we have had decent compression in
iTraxx indices and the ratio between XO and MAIN in
Series 13 reached a new low of 4.27x. It has been
partially supported by the dynamics of the roll:
actually, the bid for MAIN s13 has remained alive
with real-money selling decent amounts of roll –
perhaps as a result of the 0.5bp differential of skew
between the two indices – while on XO, hedgers
Pierre Yves Bretonniere 23 September 2010
Market Mover, Non-Objective Research Section
38
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