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

EMU Debt Monitor: Trade Ideas
• Keep BTP Sep 20/Sep 40 flatteners.
• Close 10y/20y/30y swap rec around 50bp.
• Sell BTP Feb 37 vs. BTP Sep 40.
• Buy Bund July 20 vs. July 39 in mid 40s.
• Sell Bono July 40 vs. BTP Sep 40 below 40.
Chart 1: 2020/2040 BTP, Bono, Bund Spreads
110
100
90
80
70
60
We focus this week on the very long end of cash
curves and their potential RV opportunities.
On the 10y/30y segment and its convexity, we have
pushed two key trades over the past month. On the
convexity side, we recommended receiving
10y/20y/30y swap fly in the 60/62 area in late
November, targeting the 48/50bp level. The swap fly
is now close to our target. On the curve itself, we
stressed last week that 10y/30y flatteners were the
most attractive on the BTP curve given box levels vs.
other cash curves. We entered Sep 20/Sep 40
flatteners at 85.5bp last Thursday, targeting 70bp
then 60bp in Q1 2011.
10y/30y flatteners supported by the shift in ECB’s
policy expectations
The main advantage of 10y/30y flatteners –
especially on peripherals – is the optionality linked to
a kind of a panic flattening/inversion such as that
seen on the Greek curve and its sensitivity to a repricing
of ECB rate hike expectations, especially after
last week’s ECB press conference. More precisely, if
the past is any guide, a resteepening of the Euribor
front/red segment on a shift of market participants
regarding future policy will have a flattening impact
on the curve. Table 1 summarises the sensitivity of
the main core and non-core 10y/30y segments
(Bund, OAT, Dsl, ATS, Olo, BTP and Bono) to the
money market curve, gauged with the 3 rd /7 th generic
Euribor spread. The highest correlation is obtained
for the OAT and BTP segments (above 55%) while
Olos and especially BTP segments have the highest
beta, with 10bp Euribor spread steepening leading to
2bp and 2.7bp flattening respectively. Taking into
account the relationship between the cash segment
and the Euribor curve, the Bund with DSLs and Bono
segments are the ones that seem too flat. Chart 2
exhibits the residual of the regression of the Bund
July 20/Bund July 40 vs. the money market curve
while Chart 3 plots the DSL/OAT 10y/30y box. Both
highlight the expensiveness of 30y Bunds and 2042
DSL. Recurrent pension fund buying of 30y Bunds
50
40
Apr-10 Jul-10 Oct-10 Jan-11
Sep 20/ Sep 40 BTP spd Apr 2020/Jul 40 Bono spd Jul 2020/Jul 40 Bund spd
Source: BNP Paribas
Table 1: Cash 20/40 Spreads vs. 10y/30y Swap
& Euribor Curve: BTP has Highest Sensitivity
Jul 2020/Jul 40 Bund spd Oct 2019/Avr 41 OAT spd DSL July 19/Jan 37 ATS July 20/Mar 37
Correl Eur 10y/30y 78.6% -10.3% 34.7% 84.7%
Beta 0.80 0.42 0.82
Alpha 44.12 44.49 26.62
Correl Eur 3/7 -16.0% -55.9% -25.4% 33.4%
Beta -0.10 -0.12 -0.09 0.16
Alpha 72.10 77.56 65.71 35.71
Olo Sep 20/Mar 41 Sep 20/ Sep 40 BTP spd Jul 2019/Jul 40 Bono spd
Correl Eur 10y/30y 80.1% 32.3% 37.3%
Beta 1.39 0.30 0.61
Alpha
Correl Eur 3/7 -21.7% -59.5% -33.8%
Beta -0.20 -0.27 -0.19
Alpha 71.85 104.15 91.66
Source: BNP Paribas
Chart 2: 10y/30y Bund vs. Euribor curve: Bund
Curve Too Flat
25
20
15
10
5
0
-5
-10
-15
-20
-25
Apr-10 Jul-10 Oct-10 Jan-11
Source: BNP Paribas
Jan 2020/Jul 40 Bund spd
Eric Oynoyan / Ioannis Sokos 20 January 2011
Market Mover, Non-Objective Research Section
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www.GlobalMarkets.bnpparibas.com