MARKET MOVER - BNP PARIBAS - Investment Services India

More documents

Recommendations

Info

Global: The Debt/Equity Macro Trade • Analysis of speculative positioning does not support a long equity / short bonds trade. • STRATEGY: Equity and debt performance is likely with rates frozen and unconventional policy in place. Chart 1: Speculative US Equity Positioning 100000 50000 0 -50000 -100000 Anecdotal evidence suggests that the "long equity / short bonds" trade is one of so-called smart money's big macro trades into year-end. Let's dig into the data to see what the facts are. Chart 1 shows the net positioning of non-commercial players (speculators) in futures and options on the S&P 500, Nasdaq-100 and Russell 2000. CFTC data tell us that specs are actually net short the big board and the Russell, while exposure in tech stocks is neutral. Note the negative trend in S&P positioning since 2008! Chart 2 gives us some clues as to non-commercial positioning in US government bonds (again, futures and options). Specs have recently gone net short 2y Notes, thus reversing the big 2009 roll-down strategy. On the other hand, we have neutral positioning in 10y Notes (from aggressive shorts at the start of this year) and slightly short positioning in Bonds (but again, big reversal from huge shorts in 2009 and in Q1 2010). Analysis of speculative flows does not confirm either a current positioning in or a tendency towards a "long equity / short bonds" macro strategy. Of course, we're just looking at a limited window of the global investment spectrum. So, why the discussion about this macro trade? Look at Chart 3: not only has S&P's earnings yield outpaced 10y yields since 2002, but the gap has even widened during the crisis (currently, the S&P 500 generates a 6.85% yield on earnings, while 10y Notes yield about 2.60%). Some argue that on a risk/reward basis the equity trade does not make sense. In Chart 4, we show a longterm series of equity vol (VIX) and bond vol (realised 6m weekly 10y US govt bonds). True, bond vol has dropped from the 2008/2009 excess, but equity vol has also dropped substantially, while still generating more yield than bonds. Conclusion: Do we really believe the Fed is going to kill stocks? Do we really believe the Fed is going to kill the Treasury? The answer is a double no. With rates frozen and unconventional policy in place, a period of equity and debt performance lies ahead. -150000 S&P500 net spec positioning -200000 Nasdaq100 net spec positioning -250000 Russell2000 net spec positioning -300000 2003 2004 2005 2006 2007 2008 2009 2010 Source: CFTC Chart 2: Speculative US Govvie Positioning 800000 650000 TY net spec positioning TU net spec positioning (RHS) US net spec positioning (RHS) 250000 150000 500000 50000 350000 200000 -50000 50000 -150000 -100000 -250000 -250000 -400000 -350000 2003 2004 2005 2006 2007 2008 2009 2010 Source: CFTC Chart 3: Equity vs Bond Valuation Measures 11.0% 10Y Treasury yield 10.0% S&P500 earnings yield 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 1987 1990 1993 1996 1999 2002 2005 2008 180 90 160 10Y TSY vol (6M, bp) VIX (%, RHS) 80 140 70 120 60 100 50 80 40 60 30 40 20 20 10 0 0 1990 1993 1996 1999 2002 2005 2008 Source: BNP Paribas Alessandro Tentori 23 September 2010 Market Mover, Non-Objective Research Section 18 www.GlobalMarkets.bnpparibas.com
US: Belly of the Curve is Rich, but… • The flattening rally extended the richness in the belly of the curve. As a result, 2s5s10s is at an all-time low while 10s30s is close to its steepest ever. • These valuations could become even more extended if rates briskly drop further but a correction should ensue once rates begin to stabilise as investors move out along the curve to grab yield. • STRATEGY: Once the rally shows signs of running out of steam, consider the following trades either in swap or Treasuries: (i) long the 2s5s10s fly (short the belly) and (ii) 10s30s flattener. Alternatively, initiate conditional bullflatteners, struck OTM, to ensure that they kick in only if rates drop further and stay there. 0.8 0.6 0.4 0.2 Chart 1: 2s5s10s Is at an All-Time Low, and 10s30s (Almost) as Steep as Ever 0 -0.2 -0.4 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Source: BNP Paribas 2s5s10s swap 10s30s swap (RHS) Chart 2: The 5y Is Rich, but Not to the Same Extent as in August 1.2 1 0.8 0.6 0.4 0.2 0 -0.2 The FOMC articulated its intention to provide further accommodation if needed, laying the groundwork for a new round of asset purchases. First, in anticipation of the Fed’s nod toward easing, and later in response to the confirmation of it, the Treasury market rallied, at times even in the face of stronger equities. With this rally, and the attendant flattening, the 5y rate has made a new low and the 10y is within shouting distance of one. bps 30 20 10 0 -10 Current 6m ago 6w ago Cheap Rich The belly of the curve has come out as the clear outperformer in the rally, with 2s5s10s reaching a new all-time low (see Chart 1). However, despite all appearances, the belly has not eclipsed the wings to the same extent it did in the August rally. We say this because PCA indicates that the rich/cheap signals are nowhere near the levels seen at the time. For example the 5y, while rich on the curve, is only about 12bp rich and the 10y actually looks fair (see Chart 2), whereas six weeks ago they were rich by as much as 25bp and 10bp, respectively. Therefore, it would not be unprecedented for the 5y and 10y sectors to extend their valuations in the event of a further rally. In other words, if we get a brisk rally from here, there is the risk that 2s5s10s could tighten, and 5s10s as well as 10s30s could steepen further. So, what’s one to do? Our take on this is the following: 2s5s10s and 10s30s would start to “correct” once rates find a new (lower) range and begin to stabilise. This is because investors will likely extend out the curve in their search for yield once 5s runs out of juice, similar to what happened with 2s. -20 -30 1y 2y 3y 5y 7y 10y 15y 20y 30y Source: BNP Paribas Table 1: Cost of Carry is Not Punitive in Long 2s5s10s Fly and 5s10s/10s30s Flatteners SWAP TSY Source: BNP Paribas 2s5s10s 5s10s 10s30s 1m -0.9 0.0 -0.8 3m -1.5 0.6 -2.2 6m -2.5 1.2 -4.5 1m -0.7 -0.1 -0.9 3m -2.5 -0.3 -2.5 6m -5.2 -0.7 -5.1 With the 5y Treasury yielding somewhere around 1.3% already, we may not be too far from levels that would prompt this move out on the curve anyway. Indeed, the 5s10s curve has been flattening since last Friday. Given that 2s and to a lesser extent 5s Bulent Baygun 23 September 2010 Market Mover, Non-Objective Research Section 19 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Euromoney Interest Rates Survey 201
Page 3 and 4: ECB on a different page… …but i
Page 5 and 6: developments and is prepared to pro
Page 7 and 8: and property tax payments, dropped
Page 9 and 10: directly to effect outright purchas
Page 11 and 12: Services also on the slide The ‘f
Page 13 and 14: inflation rate is calculated exclud
Page 15 and 16: closer to a more normal level” to
Page 17: point advance in the June Tankan. P
Page 21 and 22: US: A Carry Trade with Extra Potent
Page 23 and 24: MBS: Remain Underweight, GNM CBRs U
Page 25 and 26: EUR: Re-Enter Flatteners on 5y/10y
Page 27 and 28: EGBs: Market Update & Top Trade Ide
Page 29 and 30: EUR Covered Bonds: Market Update
Page 31 and 32: GBP Curve Opportunities Update •
Page 33 and 34: Table 1: BNP Paribas' Inflation For
Page 35 and 36: Table 3: BNP Paribas' Inflation For
Page 37 and 38: Table 1: BNP Paribas Carry Analysis
Page 39 and 40: have been happy to buy the roll to
Page 41 and 42: Technical Analysis - Interest Rates
Page 43 and 44: Trade Reviews Options, Money Market
Page 45 and 46: ond market attracted huge swathes o
Page 47 and 48: warning to Greek banks that it migh
Page 49 and 50: Chart 2: EUR/SEK - major support be
Page 51 and 52: Economic Calendar: 24 Sep - 1 Oct G
Page 53 and 54: Economic Calendar: 24 Sep - 1 Oct (
Page 55 and 56: Key Data Preview Chart 3: US ISM Po
Page 57 and 58: Key Data Preview Chart 7: US Consum
Page 59 and 60: Key Data Preview Chart 11: Japanese
Page 61 and 62: Key Data Preview Chart 7: UK CIPS M
Page 63 and 64: Economic Calendar: 4 - 29 October 4
Page 65 and 66: Next week's T-Bills Supply Date Cou
Page 67 and 68: Economic Forecasts GDP Year 2010 (%
Page 69 and 70:
Market Coverage Market Economics Pa
show all

MARKET MOVER - BNP PARIBAS - Investment Services India

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?