MARKET MOVER - BNP PARIBAS - Investment Services India

isk in market participants’ minds, the trade is highly
unlikely to post strong gains now.
That being said, MAIN trades much too wide when
compared to other risky asset markets; a simple
model based on European equities and equity
volatility is pricing MAIN about 7bp below its current
valuations. In the US, the similar model indicates that
IG is trading fair-value vs. the S&P500 and VIX
indices. With this in mind, we think MAIN could
momentarily outperform IG and we aim at closing the
“Long Europe / Short US” trade as soon as we
achieve 2 or 3bp of outperformance.
What’s the call? Increase in GIIPS sovereign risk
and decrease in concerns of a double-dip scenario
are making iTraxx MAIN unlikely to outperform CDX
IG. We aim at closing our “long Europe / short US” as
soon as MAIN retraced from current oversold levels.
Update on Curves:
steepener recommendation (dated 25-Mar) to take
profit at current levels.
Chart 6: Curves’ levels and changes
5y 3/5y 1W Chg 1M Chg 5/10y 1W Chg 1M Chg
MAIN s13 118 25 11
MAIN s12 112.75 26 +0 +3 14 +1.5 +5
SEN s13 153.5 7
SEN s12 150.5 10 +1 +3
SUB s13 225 5
SUB s12 218 8 +2 +4
HVL s13 177 15
HVL s12 157 20 +5 +11
XO s13 530 80 5
XO s12 470 80 +0 +10 15 +10 +18
Source: BNP Paribas
Chart 7: Fwd 5y in 5y MAIN in past 2y
Main 5/10y: Last week, we believed this curve was
fully discounting the upcoming roll; actually it didn’t
and the curve managed to steepen further from 12.5
to 14 despite the volatile/bearish context. We believe
that this curve is too steep relative to the level of the
5y (chart7).
250
225
200
175
150
125
100
Fwd 5y in 5y
spot 5y
90
130
Given our view that MAIN has overshot, we think the
best way to play the steepness of the curve is to go
long the 5y in 5y which has broken its long-term
resistance.
What’s the call? The 5/10y is now too steep vs. the
5y and the forward is very toppish; we advise to buy
the 5y in 5y. Entry levels: MAIN 10y: 129; MAIN 5y:
119
Main 3/5y: the call on the 3/5y is much less obvious;
yes, the level of the 3/5 looks too steep vs. the 5y but
the strength of the relationship between the outright
and the curve is much weaker than for the 5/10y. The
key decision factor is the level of the forward 2y in 3y
which is quite high but it did not break the 155 level
which will be the buying signal.
What’s the call? The 3/5y is very steep relative to
the 5y and the forward is high but it has not reached
a level where the flattener is a no-brainer. We stay
away for now.
XO 5/10y: in line with our expectations, we had
further steepening of XO 5/10y curves with the roll.
We closed last week our steepener in s12 and kept
the one in s13 to benefit from the last bit of the rally.
We now see little upside in the curve at current levels
– it trades quite steep relative to the outright level of
the 5y - and advise the investors who followed our
75
50
25
0
9/08 11/08 1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10 9/10
Source: BNP Paribas
resistances of the
5y in 5y
Chart 8: Fwd 2y in 3y MAIN in past 2y
250
200
150
100
50
0
9/08 11/08 1/09 3/09 5/09 7/09 9/09 11/09 1/10 3/10 5/10 7/10 9/10
Source: BNP Paribas
MAIN Spot 2y
MAIN Fwd 2y in 3y (rhs)
105
155
resistance levels of
2y in 3y
Note that the level of the forward 5y in 5y has also
significantly increased in the past 2 weeks; it does
not signal a buying signal yet.
What’s the call? We take profit on our 5/10y
steepener in s13 which trades now too steep given
the level of the outright. The total P&L of the trade,
including carry, is equivalent to a steepening of 20bp.
Pierre Yves Bretonniere 23 September 2010
Market Mover Non-Objective Research Section
40
www.GlobalMarkets.bnpparibas.com