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

EMU Debt Monitor: SSA & Covered Bonds
• The recent richening of OBND, the Austrian
agency, in the 10y area seems overrated.
• In this segment of the curve, Dutch agencies
offer a better yield and positive rolldown.
• STRATEGY: Sell OBND Oct 2020 / Buy BNG
Sep 2020 or NEDWBK Jan 2021 (yield pickup:
7bp and 9bp resp.).
Supply out of European SSA is not slowing. Seven
benchmarks have been issued so far this week.
NRW.BANK and ICO each issued a new EUR 1bn
benchmark while KFW, CADES, EIB and NIB
launched new bonds denominated in USD (USD
1.5bn, 2.5bn, 4.5bn and 1bn respectively). The
inaugural EFSF transaction is expected to be
launched by the end of the month. The new 5y EUR
benchmark is likely to add EUR 3-5bn to the USD
54bn (equivalent) European SSA issued so far this
month. This will be a key event to watch.
In the meantime, we highlight below an attractive RV
trade amongst Dutch and Austrian agencies. Indeed,
the gradual richening of the Austrian agency OeBB
Infrastruktur, in the 10y area (OBND Oct 20), seems
excessive at current levels. That is, compared to the
neighbouring maturity bullets of the OBND curve, to
underlying RAGB but also its compatriot agency,
ASFINAG (Chart 1).
It is even more interesting to compare OBND Oct 20
to BNG and NEDWBK, the Dutch agencies. First of
all, let’s recall that being exposed to Austria is
perceived as riskier than being long the Netherlands,
as priced by the CDS and government bond markets.
Netherlands CDS 5y is trading close to Germany and
is 36bp tighter than Austria; in govvies space, RAGB
Jul 20 is 21bp wider than DSL Jul 20.
OBND Oct 20 is currently richer than BNG Sep 20
(ASW diff: +3bp) and NEDWBK Jan 21 (ASW diff:
+5bp) (Charts 1 & 2). However, such relative levels
are recent (Chart 2). We do not believe that the
current positive ASW differentials can be long lived,
especially as fundamentals support the opposite.
One could of course question the relative levels
amongst EGBs. However, there is no equivalent
richening of ATs versus DSLs in the 10y area, none
that could explain the richening of OBND versus
Dutch agencies. Agencies’ spreads to underlying
govvies play in favour of the Dutch agencies. Indeed,
if the premium BNG has to offer versus DSLs has
been rather stable over the past 6 months, it has
widened over the past year (from 16bp early 2010 to
34bp today) while OBND has richened versus ATs
over the past 6 months (from 24bp to 10bp).
40
30
20
10
0
Chart 1: Dutch & Austrian Agencies’ Term
Structures (ASW)
ASW
OBND Oct 20 looks rich
-10
ASFING OBND
NEDWBK BNG
-20
0y 5y 10y 15y 20y
Source: BNP Paribas
Chart 2: Agencies’ ASW Differentials
8
6
4
2
0
-2
-4
-6
-8
-10
-12
OBND Oct 20 vs BNG 3.875 04/11/19
OBND Oct 20 vs BNG 2.625 01/09/20
OBND Oct 20 vs NEDWBK 3.5 14/01/21
-14
Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11
Source: BNP Paribas
Chart 3: Spreads to Govvies Differentials
40
35
30
25
20
15
10
5
BOX 1: BNG/DSL 2020 vs OBND/AT 2020
0
BOX 2: BNG/DSL 2019 vs OBND/AT 2020
-5
BOX 3: NEDWBK/DSL 2021 vs OBND/AT 2020
Nov 09 Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11
Source: BNP Paribas
Chart 3 depicts the effects of both the richening of
OBND versus Dutch agencies and the widening of
the relative agencies’ premiums to govvies, also in
favour of BNG. With the exception of June 2010
(when ATs jumped to extreme levels), we are
currently in the upper range.
Dutch agencies in the 10y area currently offer great
value vs OBND Oct 20 and DSLs. Further, the
rolldown is positive on BNG and NEDWBK while
negative on OBND Oct 2020. Investors long OBND
Oct 20 should switch into BNG Sep 20 or NEDWBK
Jan 21.
Camille de Courcel 20 January 2011
Market Mover, Non-Objective Research Section
46
www.GlobalMarkets.bnpparibas.com