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

SEN vs. SUB
There has been no strong move in SUB/SEN ratio
this week; at the time of writing FIN SEN and SUB
indices are both tighter by 5bp w-o-w, signalling
some decompression. In cash, the move is very
similar with iBoxx Financials SEN and LT2 both
tighter by 6bp. See chart 7 and 8. In financials, the
major move has been the outperformance of T1
(+1.9pt in price or 71bp of spread tightening) and to a
lower extent UT2 (+0.7pt in price or 23bp in the
spread).
What’s the call?
As already mentioned above, the potential for further
tightening in FIN is probably fairly limited but it should
benefit from the further decrease in systemic risk; we
see the potential even more limited for the SUB
index, less systemic, and still subject to the long
position of dealers on callable LT2 and to the
attractive level of basis on both bullet and callable
bonds.
For this reason, we think there is more
decompression SUB/SEN to come should the market
remain constructive (less systemic, more basis
players).
HVL vs. MAIN
There has been no momentum at all in the HVL /
MAIN relationship this week; the ratio between the 2
indices stands at 1.49 for more than a week now.
Our view remains that the different categories of
names within HVL (consumer/retail, PIIGS-related
and highly-cyclical credits) make the call on the index
hazardous, unless being very bearish or very bullish
on the market.
What’s the call?
Our medium-term view remains Constructive on HVL
PIIGS-related names (which are Utilities and
Telecoms) vs. market, Neutral on HVL
consumer/retail vs. market and bearish on HVL
highly-cyclical names vs. market; these 3 diverging
views make us Neutral on HVL vs. MAIN.
Chart 6: SUB/SEN ratio for iTraxx CDS indices
2.00
1.90
1.80
1.70
1.60
1.50
iTraxx Sub / Sen (s13)
Q1 (6m)
Median (6m)
Q3 (6m)
1.40
7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10 7/10
Source: BNP Paribas
Chart 7: SUB/SEN ratio for iBoxx Cash indices
2.40
2.30
2.20
2.10
2.00
1.90
1.80
1.70
1.60
1.50
7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 3/10 4/10 5/10 6/10
Source: BNP Paribas
Chart 8: HVL vs. MAIN history
220
200
180
160
140
120
100
80
60
iBoxx LT2/SEN ratio (OAS)
1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10
Source: BNP Paribas
DJITX13 MST DISCONT
DJITX13 HVL DISCONT
490
440
390
340
290
240
190
140
90
Note that our basket short Mittal / Lafarge / Holcim /
Akzo / Schneider vs. NON-FIN has not lost a single
bp this week despite the tightening of the market and
is still a very good option for us.
Pierre Yves Bretonniere 16 July 2010
Market Mover, Non-Objective Research Section
45
www.GlobalMarkets.bnpparibas.com