Market Outlook - BNP PARIBAS - Investment Services India

EMU Debt Monitor: Key RV ChartsThis publication is classified as non-objective researchChart 3: Observed vs. Fitted Eur 1y Fwd2y/5y/10y Swap Fly: Normalisation StartedChart 4: 2y/10y OAT/Bund Box: Back toPre-SMP 2.00 Extremes2015Hedged Eur 1y fwd 2/5/10 swapLEH collapseUS QE 25040Obl Oct 13 / OAT Apr 20 cheapSMP2010305200102y BTANalmost fully-5recovered0-10Obl Oct 13 / OAT Apr 20 expensiveECB July 2008 hike -10-15May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11Jan-02 Dec-02 Dec-03 Nov-04 Nov-05 Oct-06 Oct-07 Sep-08 Sep-09 Aug-10 Aug-11Hedged fly FV + 2.5 st dev FV - 2.5 st devOAT/Bund Oct 13/Apr 20With the rebound of the schatz future on its long-run support,the 1y fwd swap fly has normalised slightly over the pastweek. The observed vs. fitted value has narrowed from 13 to9.5bp. Keep rec 1y fly either outright or vs. payer 1y GBP fly.Chart 5: July 13/July 14 BTAN/Bund Box:BTAN July 14 Very CheapMoody’s warning about France’s rating led to a morepronounced OAT/Bund spread widening on the 10y maturity.The stronger move on the 10y pushed the 2y/10y OAT/Bundbox back to pre-SMP 2.00 levels.Chart 6: Fin/DSL 10y/15y Box:15y Fin Too Cheap251415FIN July 25 expensive20121010158510604-552-10FIN July 25 cheap0Aug-11 Sep-11 Oct-11BTNS 3 12/07/14 ASW-BTNS 4.50 12/7/13 ASWDBR 4.25 7/14 ASW-DBR 3.75 7/13 ASWBTNS 3 07/14 ASW-BTNS 4.50 7/13 ASW-DBR 4.25 7/14 SER 04 ASW-DBR 3.75 7/13 ASW (RHS)Like the 2y/10y OAT/Bund box, the 2y/3y one using July13/July 14 spiked back to August-September’s highs. WithBTAN July 13/July 14 above 40bp while the Bund segment is23/24bp, we recommend selling BTAN July 13 into July 14.Chart 7: 10y/30y Olo Observed vs. Fitted:30y Olo is Too Expensive0-15Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Fin Apr 20/July 20/July 25/ DSL Jan 28While the Fin/DSL 2020 spread has tightened back, the 15yspread using (July 25 vs. Jan 28) continued to widen,reaching 14bp. After such a decoupling the 10y/15y Fin/DSLbox is now back to 2010’s extremes i.e. Fin July 15 too cheap.Chart 8: 2y/10y Olo/OAT box:the 2y Olo Will Soon be Back to a Very Cheap Level3050OLO 2013 too cheap204030Historical Average + 2.0 st dev2013 Olocheapening10201000-10-10-20-20-30May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11-30-40Historical Average - 2.0 st devOLO 2013 expensive-50Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Olo Sep 20/Mar 41In contrast to the OAT 10y/30y sector, the Olo one is tradingaround 10bp too low (i.e. Olo 2041 is too expensive) and waseven 14bp too low a few days ago. We still recommendselling Olo 31 (Mar 28) into Olo 61 (Mar 21) targeting 38/40bp.All charts source: BNP ParibasOlo Sep 13/Oct 13/Sep 20/July 20The 2y Olo’s value has more than normalised since lateSeptember. The 2y/10y Olo/OAT box is now only 10bp fromlevels that would indicate the 2y Olo is back to a very cheaplevel. Keep Olo Sep 13/Sep 16 flatteners for 20bp move.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover34www.GlobalMarkets.bnpparibas.com