MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
MARKET MOVER - BNP PARIBAS - Investment Services India
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EGBs: Market Update & Top Trade Ideas<br />
• Greece is outperforming across peripherals,<br />
Portugal and Ireland are breaking new wides<br />
while Spain and Italy are more resilient than in<br />
the past widening episodes.<br />
• This 3-speed Europe’s periphery has been<br />
with us for over a month now and could persist<br />
for the coming months.<br />
• STRATEGY: Italy remains our favourite pick<br />
among the eurozone periphery. We believe the<br />
Greek curve’s steepening could continue in the<br />
near term. On a risk/return framework, we find<br />
Irish Gilts more attractive than PGBs at current<br />
levels.<br />
The way peripheral Europe trades has changed<br />
fundamentally over the past few weeks. We are not<br />
used to seeing Greece outperforming versus the rest<br />
of the periphery while Ireland and Portugal are<br />
breaking new wides every day. For the first time,<br />
Greece is actually feeling the protection of the<br />
EU/IMF mechanism while the market’s focus has<br />
shifted towards the other two small peripheral<br />
countries, i.e. Ireland and Portugal. Spain has been<br />
trading like Italy since the release of the stress test<br />
results in July and this has led to a 3-speed periphery<br />
of (i) Greece, (ii) Portugal and Ireland and (iii) Italy<br />
and Spain. Chart 1 clearly illustrates this point,<br />
showing the changes in ASW since the beginning of<br />
September.<br />
Starting with Greece, the massive steepening move<br />
in 1/2s and 2/10s has continued in the last few<br />
weeks. The disbursement of the second tranche of<br />
the EU/IMF package has been a catalyst for the rally<br />
in the 2011 GGBs. Beyond that, some positive<br />
rhetoric from EU authorities and a bit of praise for the<br />
tough decisions and the degree of fiscal<br />
consolidation that the Greek government has<br />
achieved in the first eight months of the year have<br />
pushed Greek spreads lower. Of course, we have to<br />
treat this compression with a pinch of salt as it is<br />
taking place in very thin markets. It will take longer to<br />
convince investors that Greece can actually avoid<br />
default or restructuring. Irrespective of this, and in<br />
line with the IMF wording, Greece has made a strong<br />
start on its programme and has slowly started being<br />
rewarded for this in terms of spreads behaviour,<br />
especially at the front end. Chart 2 shows the change<br />
in Greek yields across the curve in September.<br />
Continuing with Ireland and Portugal, we saw a<br />
significant widening ahead of their auctions in the<br />
past week. A combination of negative sentiment<br />
Chart 1: 3-Speed Europe’s Periphery in Sep.<br />
100<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
-200<br />
-250<br />
Source: <strong>BNP</strong> Paribas<br />
ASW Changes of Peripheral Spread in September<br />
2y 5y 10y 30y<br />
Chart 2: The Steepening of the Greek Curve<br />
Source: <strong>BNP</strong> Paribas<br />
GRE<br />
ITA<br />
SPA<br />
POR<br />
Chart 3: POR & IRE Underperformance in Sep.<br />
70<br />
60<br />
50<br />
40<br />
30<br />
20<br />
10<br />
50<br />
0<br />
-50<br />
-100<br />
-150<br />
-200<br />
-250<br />
-300<br />
-350<br />
-400<br />
-450<br />
3-<br />
2011<br />
8-<br />
2011<br />
Changes in ASW in September<br />
POR<br />
0<br />
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025<br />
Source: <strong>BNP</strong> Paribas<br />
GGBs Yields Change in September<br />
2012 GGBs Following the Rally<br />
2011 GGBs Massive Rally<br />
5-<br />
2012<br />
5-<br />
2013<br />
1-<br />
2014<br />
8-<br />
2014<br />
8-<br />
2015<br />
Longer-end is more resilient to<br />
the compression move<br />
4-<br />
2017<br />
7-<br />
2018<br />
10-<br />
2019<br />
10-<br />
2022<br />
3-<br />
2026<br />
towards peripherals and the upcoming auctions<br />
amplified the usual pre-auction widening that we see<br />
in smaller peripherals. Chart 3 shows the widening<br />
and the flattening that we have seen on both Irish<br />
and Portuguese curves in September so far. 2013/14<br />
maturity bonds have suffered most of the widening<br />
while the longer end has been the most resilient.<br />
After the auction, we witnessed a short-lived<br />
correction in both countries but this was not enough<br />
to pare back the widening of the last weeks.<br />
IRE<br />
IRE<br />
9-<br />
2040<br />
Ioannis Sokos 23 September 2010<br />
Market Mover, Non-Objective Research Section<br />
27<br />
www.GlobalMarkets.bnpparibas.com