Market Outlook - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchInflation: CPI and OAT/Bund• Mixed CPI and carry profile from November.• OATei BE cheap but OAT/Bund has totighten back.• UKTI 2062 next week. Value in BE and ASW.101.6101.2Chart 1: Daily Reference Indicesfrom 1 NovemberDaily Reference IndexUKInflation data surprised on the upside in the UK andthe eurozone this week and to the downside in theUS and France. Chart 1 shows the profile for theDaily Reference Indices (rebased at 100 on 1November) for each market. Unsurprisingly, carry willbe strong for EUR and GBP, especially in November,and lacklustre in France and the US. Chart 2 showsthe moves in short-end breakevens in recent weeks.OBLei13 and OATi13 BE have risen higher inconcert, which is not justified by the levels offorwards, hence our recommendation to sell OATi13BE versus OBLei13 BE. The UKTI13 breakeven fellrecently and looks cheap in our view. We would bemore neutral as far as the TIPS Apr13 is concerned.See focus on the US inflation market regarding theFed’s selling back operation.Another event this week was the widening of the 10yOAT/Bund spread above 100bp for the first timesince 1995 when nominal yields were running ataround 8%. As we noted last week, the widening hasless impact than usual on risky assets such asequities, commodities and, more surprisingly,EURUSD. The current level of the currency makesOBLei18 look fair to rich versus TIPS while OATeireal yields look attractive versus both of them. Stresson EGBs remains the main risk for EUR breakevens.Next week’s index extensions (around +0.35y in theUK, +0.17y in the US) should bring some support forthe long end. The US/EUR 10/30y BE box hasmoved by 20bp but there is still potential for flatteningin the eurozone and steepening in the US.In the UK, the strong RPI will maintain flatteningpressure on the inflation curve. Liquidity is low in UKlinkers whilst volatility remains high – UKTi-55 tradedin a 6 figure range (compared to 15 big figures+ lastweek!). The market is looking ahead to the UKDMO’s launch of a new 50y UKTi benchmark. Thebond will have a coupon of 0.375% and maturity22-March-2062. The UKTi-55 has been the weakestperformer in real yield and breakeven since 31August when Q4’s syndicated issuance calendar wasannounced (Chart 3). A potential size of GBP 3.5bnwould be worth +0.4y in terms of index extension atthe end of October. We expect strong extension andLDI activity with breakevens, real ASW and ASW100.8100.4100.099.601-Nov 01-Dec 01-Jan 31-JanSource: BNP ParibasSource: BNP Paribas6040200-20-40-60-80discounts offering strong value, and real yieldsbacking up towards 40bp at the ultra-long end at thetime of writing. We favour 10/50y real yield flattenersand 20/50y breakeven steepeners although long 50ybreakeven (at close to 3%) or receiving UKTi-62ASW at potentially Libor + 60bp, also look attractive.FRFChart 2: 2013 Inflation BreakevensUSEURChart 3: Carry Adjusted Changes in UKTIsince 31 AugustRY Move since 31-Aug (carry-adj)NY Move since 31-Aug (carry-adj)BE Move since 31-Aug (carry-adj)U13 U16 U17 U20 U22 U24 U27 U30 U32 U34 U35 U37 U40 U42 U47 U50 U55Source: BNP ParibasHerve Cros / Shahid Ladha / Aaron Kohli 20 October 2011Market Mover44www.GlobalMarkets.bnpparibas.com