Market Economics | Interest Rate Strategy - BNP PARIBAS ...

give-up because we’re switching from an old 7yr to
an old 10yr which will tend to trade richer. However
as Chart 3 shows, the old 10yr has almost always
traded richer than the current 4bp, and two months
ago traded as rich as 10bp. (Z-score methodology
suggests the spread should be 3.2bp lower)
2.75% Feb-19s vs 3.125% May-19s (Chart 4)
This switch is amongst the more liquid issues, since
both are fairly recent 10y notes. In Chart 4 it looks as
if this spread has gradually grinded higher so the
mean-reversion qualities may not be as compelling
(although Z-scores suggest the pick-up should be
closer to 5bp than the current 7bp). Still, the current
shape of the yield curve does not suggest that the
spread could roll any higher, since the spread
between older 10yr notes is fairly constant at 7bp.
Chart 3: 3.25% May-16s vs 5.125% May-16s
0
1
0
-2
-1
-4
-2
-3
-6
-4
-8
-5
-10 Yield Spread
-6
ASW Diff (RHS)
-7
-12
-8
Jul-09 Oct-09 Jan-10 Apr-10 Aug-10
Source: BNP Paribas
7.875% Feb-21s vs 8.125% May-21s (Chart 5)
In the sector of old bonds, there is a fairly steep
rolldown as old 30yrs roll into the 10y sector. This
makes it attractive to extend maturity for those
holding issues in the 10-11y sector. Chart 5 shows
that the pick-up has risen to the top end of its range
recently, and the current spread of 4bp appears to be
rolling flat when compared to shorter-maturity old
bonds.
8
7
6
5
4
3
2
1
Chart 4: 2.75% Feb-19s vs 3.125% May-19s
Yield Spread
ASW Diff (RHS)
6
5
4
3
2
1
0
0
-1
-1
-2
-2
-3
Jul-09 Oct-09 Jan-10 Apr-10 Aug-10
Source: BNP Paribas
Chart 5: 7.875% Feb-21s vs 8.125% May-21s
5
5
4
4
3
3
2
2
1
Yield Spread
1
ASW Diff (RHS)
0
0
Jul-09 Oct-09 Jan-10 Apr-10 Aug-10
Source: BNP Paribas
Suvrat Prakash 16 July 2010
Market Mover, Non-Objective Research Section
23
www.GlobalMarkets.bnpparibas.com