Market Mover - BNP PARIBAS - Investment Services India

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EUR: Monitoring Dutch Pension Funds • Asset allocation and duration risk analysis suggest that pension funds remain very sensitive to swap curve and equity gyrations. According to official DNB data and given swap and equity markets’ evolution over the past four months, we estimate the industry-wide cover ratio for Dutch pension funds to be around 106%. This is a minor deterioration from the 109% reported in Q3 2009. However, the interesting issue is more related to duration risks and less to solvency risks. In Chart 1, we show the evolution of assets, liabilities and cover ratios for Dutch pension funds. Also, we show a variable called “duration gap”, a measure of the sensitivity of pension fund portfolios to asset and liability dynamics. Notably, the duration gap has not improved in line with cover ratios and remains at very high levels (EUR 325bn 30Y risk). This is an indication that aggregate Dutch pension funds did not make significant changes to their asset allocation in 2009, i.e. they have not used the proceeds from the rally in risky assets to hedge some of their asset vs liability mismatch. We validate this assumption by looking at the evolution of simplified asset allocations in recent years. In Chart 2, we can see that the estimated 2009 bond/equity allocation has not changed significantly from reported 2008 levels. Conclusion: We think Dutch pension funds are more sensitive to equity and swap curve volatility than previously thought on the basis of 2009’s rally in risky assets. As such, an equity sell-off coupled with bull flattening of 10/30s remains the pain trade. 750 700 650 600 550 500 450 400 -100 -150 -200 -250 -300 -350 -400 Chart 1: Cover Ratio vs Duration Gap EUR bn Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 EUR bn Assets Technical provision Funding ratio LIVE 1997 1999 2001 2003 2005 2007 Q3/09 Source: BNP Paribas, DNB 55% 50% 45% 40% 35% 30% 25% Chart 2: Asset Allocation Equities Duration gap (30Y risk) 1997 1999 2001 2003 2005 2007 Source: BNP Paribas, DNB Fixed income 2009 (Est.) 160% 140% 120% 100% 80% 60% Live COVER RATIO PROJECTION - RISK SCENARIO: BULL FLATTENING SWAP CURVE EQUITY 10Y -100 -90 -80 -70 -60 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 30Y -110 -99 -88 -77 -66 -55 -44 -33 -22 -11 0 11 22 33 44 55 66 77 88 99 110 CURVE 0.25 0.26 0.27 0.28 0.29 0.30 0.31 0.32 0.33 0.34 0.35 0.36 0.37 0.38 0.39 0.40 0.41 0.42 0.43 0.44 0.45 -50 73% 74% 75% 76% 77% 79% 80% 81% 82% 83% 85% 86% 87% 89% 90% 91% 92% 94% 95% 96% 97% -45 75% 76% 77% 78% 79% 81% 82% 83% 84% 86% 87% 88% 89% 91% 92% 93% 95% 96% 97% 99% 100% -40 76% 77% 79% 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 94% 96% 97% 99% 100% 101% 103% -35 78% 79% 80% 82% 83% 84% 86% 87% 88% 90% 91% 93% 94% 95% 97% 98% 100% 101% 102% 104% 105% -30 80% 81% 82% 84% 85% 86% 88% 89% 90% 92% 93% 95% 96% 98% 99% 100% 102% 103% 105% 106% 108% -25 81% 83% 84% 85% 87% 88% 90% 91% 92% 94% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 110% -20 83% 84% 86% 87% 89% 90% 92% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 108% 110% 111% 113% -15 85% 86% 88% 89% 91% 92% 93% 95% 97% 98% 100% 101% 103% 104% 106% 107% 109% 111% 112% 114% 115% -10 87% 88% 89% 91% 92% 94% 95% 97% 99% 100% 102% 103% 105% 107% 108% 110% 111% 113% 115% 116% 118% -5 88% 90% 91% 93% 94% 96% 97% 99% 101% 102% 104% 105% 107% 109% 110% 112% 114% 115% 117% 119% 120% 0 90% 92% 93% 95% 96% 98% 99% 101% 103% 104% 106% 108% 109% 111% 113% 114% 116% 118% 120% 121% 123% 5 92% 93% 95% 96% 98% 100% 101% 103% 105% 106% 108% 110% 112% 113% 115% 117% 119% 120% 122% 124% 126% 10 94% 95% 97% 98% 100% 102% 103% 105% 107% 108% 110% 112% 114% 116% 117% 119% 121% 123% 125% 126% 128% 15 95% 97% 98% 100% 102% 103% 105% 107% 109% 110% 112% 114% 116% 118% 120% 121% 123% 125% 127% 129% 131% 20 97% 99% 100% 102% 104% 105% 107% 109% 111% 113% 114% 116% 118% 120% 122% 124% 126% 128% 130% 131% 133% 25 99% 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 118% 120% 122% 124% 126% 128% 130% 132% 134% 136% 30 100% 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 128% 130% 132% 134% 136% 138% 35 102% 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141% 40 104% 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 137% 139% 141% 143% 45 106% 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 133% 135% 138% 140% 142% 144% 146% 50 107% 109% 111% 113% 115% 117% 119% 121% 123% 125% 127% 129% 131% 134% 136% 138% 140% 142% 144% 146% 149% Alessandro Tentori 12 February 2010 Market Mover, Non-Objective Research Section 22 www.GlobalMarkets.bnpparibas.com
EUR: Peripheral ASW Curves Re-Steepening • As the contagion from Greece to other peripherals has been mainly taking place through a flattening of their ASW curves… • …we expect this to correct once the EU support package for Greece is announced. The correction has already started for Portugal but Spain has lagged relative to other peripherals. • STRATEGY: Expect the Spanish 2/10s to resteepen in the coming days. This could also be expressed via a 2/10s BOX of Spain vs Italy. In the past few weeks, we have been analysing the contagion from Greece to other peripheral countries through the development of flattening forces on their ASW curves. The Greek curve has been inverted since mid-January (maximum inversion of -146bp) while the Portuguese 2/10s also inverted slightly (max of -8bp) at the beginning of February. Moreover, even the Spanish and Italian curves started flattening aggressively although their 10y spread to Bund level was more resilient to the recent widening episode. This week’s headlines on EU support for Greece led to a reversion of these latest trends, with non-core spreads tightening massively and peripheral ASW curves re-steepening. Chart 1 shows the change in the periphery’s ASW levels since Tuesday 9 February, the day when rumours of a Greek bailout started. Greek and Portuguese 2/10s steepened by a massive 61bp (as of Thursday 1pm GMT), while Italian & Spanish 2/10s steepened by 15bp & 23bp respectively, thereby paring back most of their previous flattening (more details on the table in Chart 1). Chart 2 shows the accumulated change in 2/10s of peripheral ASW curves since 19 November, the start of the Greek crisis. While the Portuguese curve resteepened to such an extent that it is now trading at a higher level in 2/10s than on 19 Nov, the Greek and Spanish 2/10s have further steepening ahead in order to reach November’s levels. This translates to around 18bp for SPGBs 2/10s and 172bp for GGBs. Of course, in the case of Greece, part of the credit risk premium may remain in the front end so we could see the curve not reaching pre-crisis levels, but in the case of Spain we expect a similar outcome to Portugal, where the curve totally pared back the previous flattening in only three days. A more defensive way to express this view would be to play the BOX of SPGB 2/10s steepening versus BTPs flattening (Short SPGB 10y vs Long BTP 10y & opposite in 2y maturity). Spain’s higher credit rating Chart 1: Past 3 Days Change in Peripheral ASW Curves. Massive Re-Steepening Taking Place 10 -10 -30 -50 -70 -90 -110 -130 -150 -170 2012 2014 2017 2020 2022 2025 should at least be visible in the front end of the curve, where 2y SPGBs should trade tighter than 2y BTPs. This is not the case at the moment, as is shown in Chart 3: BTP and SPGB curves have almost identical curves. SPA GRE IRE ITA POR ASW 2/10s GER FRA ITA SPA IRE POR GRE Change since Nov 19th: 11.10 8.96 -0.05 -17.83 -26.78 12.13 -172.78 MAX (Change in 2/10s) 16.0 18.2 12.9 6.0 12.8 21.0 2.2 MIN (Change in 2/10s) Since Mon Feb 8th: Source: BNP Paribas -1.4 0.0 -19.3 -43.0 -46.7 -56.2 -239.3 Peripherals felt most of the flattening forces -3.86 -8.14 15.70 23.35 19.91 60.86 61.22 Massive steepening correction in the last 3-days Chart 2: 2/10s (ASW) Change Since 19 Nov – Further Steepening Potential for Spanish Curve 30 20 10 0 -10 -20 -30 -40 -50 -60 -100 -150 -200 -250 -70 -300 Nov-09 Dec-09 Jan-10 Feb-10 Source: BNP Paribas ITA POR SPA IRE GRE (RHS) Chart 3: 2/10s in ASW Vs 2y ASW Levels & POR vs SPA vs ITA ASW Curves 2/10s ASW 130 110 FRA 90 70 50 30 10 -10 AUS GER 100 60 BEL 20 -60 -100 ITA SPA IRE POR -50 0 50 100 150 200 250 300 350 400 450 -20 2y ASW GRE 2012 2014 2016 2018 2020 2022 2024 Source: BNP Paribas POR ITA SPA 50 0 -50 130 110 90 70 50 30 10 -10 Ioannis Sokos 12 February 2010 Market Mover, Non-Objective Research Section 23 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: gave a few specific details on the
Page 5 and 6: More clarity was given on the seque
Page 7 and 8: Sovereign Debt: Time for Europe to
Page 9 and 10: The PS is more likely to face in th
Page 11 and 12: outlook for GDP and inflation. So h
Page 13 and 14: On inflation, Riksbank’s language
Page 15 and 16: Spending on other areas never did i
Page 17 and 18: would argue that resolving this iss
Page 19 and 20: Ramifications for Rates, Swap Sprea
Page 21: EUR: Demand for ECB’s Liquidity S
Page 25 and 26: JGBs: Wait for Price Dips in Q2 •
Page 27 and 28: Table 1: BNP Paribas' Inflation For
Page 29 and 30: Table 3: BNP Paribas' Inflation For
Page 31 and 32: Table 1: BNP Paribas Carry Analysis
Page 33 and 34: Update on curves 5/10y indices’ c
Page 35 and 36: Technical Analysis - Interest Rates
Page 37 and 38: Trade Reviews Options, Money Market
Page 39 and 40: leave the euro significantly lower.
Page 41 and 42: open for further measures if requir
Page 43 and 44: EUR/SEK has broken sharply lower th
Page 45 and 46: Economic Calendar: 12 - 19 February
Page 47 and 48: Key Data Preview 115 105 95 85 75 6
Page 49 and 50: Key Data Preview Chart 5: Italian G
Page 51 and 52: Key Data Preview Source: Reuters Ec
Page 53 and 54: Key Data Preview Chart 13: Norwegia
Page 55 and 56: Key Data Preview Chart 17: UK Retai
Page 57 and 58: Economic Calendar: 15 February - 12
Page 59 and 60: Next week's T-Bills Supply Date Cou
Page 61 and 62: Economic Forecasts GDP Year 2009 20
Page 63 and 64: Market Coverage Market Economics Pa

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