Market Outlook - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchrichening of the 5y ATS has been greater thanforecast (25bp).Sell OAT Apr 21 into Apr 26This trade, recommended two weeks ago, was a wayto exploit the excessive steepeness of the 10y/30yOAT segment. The spread has already flattened byroughly 8bp but, as Chart 4 shows, it still has somepotential as the observed 10y/30y OAT segment istrading 11/12bp too steep. Moreover, if the past isany guide, the example of the BTP and Bonosegments last July, when the 10y/30y segmentscollapsed 25 to 35bp below their fair value, showsthat OAT flatteners on that segment can be a cheapput on further eurozone upheaval.New trade recommendationsIn terms of relative value, we see a few tradingopportunities on the OAT curve.2y/4y area: July 13/July 14 BTAN switchAs stressed in the RV charts section, BTAN July 13has outperformed both BTAN July 14 and versusSep 13. Versus Sep 13 the yield pick-up spiked from7 to 16bp while BTAN July 13 repo conditions are notspecial. Versus BTAN July 14, the BTANJuly 13/July 14 spread steepened by almost 20bp(Chart 5), while the Bund one has remained stable.Strategy: we recommend selling BTAN July 13either into BTAN Sep 13, enjoying a 15/16bp pick-up,or for the more aggressive, into BTAN July 14. Thespread around 41-42bp should tighten back to thelow 30s.7y/10y areaThe Jan 14/Jan 20 Bund segment’s steepening hasstopped with the test of the critical long-term supporton schatz (around 109.35/40 on the Z1 contract).Moreover, as stressed on the previous page and inthe RV charts section, most 2y/10y OAT boxes toAAA are back to pre-SMP 2.0 levels – i.e., the 10yOAT too cheap. Versus Bunds, the box is in the mid40s, depending on the bonds used. If the past is anyguide, 2y/10y BTP and Bono ASW boxes to Bundstopped in 2011 in the high 30s and 40s, respectively– close to the current box level for OAT/Bund. Thismeans that, although unlikely, any additionalwidening pressures on OAT/Bund spreads shouldstart to focus at the short end of the French curve asseen earlier this year for BTP and Bonos. Thealternative scenario – our preferred one – is thatmajor announcements after the EU summit on 23October will allow the box to adjust lower withstronger 10y OATs.Chart 4: OAT 10y/30y Segment Normalisation isWell Entrenched3020100-10-2030y OAT expensive-30Feb-10 Aug-10 Feb-11 Aug-11Source: BNP Paribas10y/30y OAT spread vs Euribor slopeSpec on AAAstatus lossAvr 20/Avr 41 OAT spd30y OAT toocheapChart 5: BTAN July 13/July 14 ASW & ASW Boxto Bunds: BTAN July 14 Too Cheap2520151050Aug-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)Source: BNP Paribas0.450.40.350.30.250.20.150.10.05Chart 6: BTAN Jan 14/OAT Apr 20 Spread andOAT/Bund 2014/2020 BoxAug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11Source: BNP ParibasFRTR 3.5 04/20 YLD-BTAN 2.50 01/14 YLD-DBR 3.25 01/20 YLD-DBR 4.25 1/14 YLDFRTR 3.5 04/20 YLD-BTAN 2.50 01/14 YLD (RHS)2141210864201.91.81.71.61.51.41.31.2Strategy: Sell BTAN Jan 14 vs. OAT Apr 20 in the163/165bp area, targeting a move below 150bp.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover36www.GlobalMarkets.bnpparibas.com