MARKET MOVER - BNP PARIBAS - Investment Services India

Market Economics | Interest Rate Strategy | Forex Strategy 24 March 2011 

Market Mover 

Market Outlook 2-3 

Fundamentals 

• US: Stirred Not Shaken 4-6 

• Japan: Fiscal Sustainability Now 7-10 

• Japan: When Will Power 11-12 

Rationing End? 

• Global: Supply Chain Disruptions 13-14 

• Eurozone: Holding Firm 15-16 

• Portugal: Towards the EFSF 17-18 

• UK Budget 2011: Tweaking at the 19-21 

Margins 

Interest Rate Strategy 

• US: A Gradual Move Higher and 22-23 

Steeper 

• US: Remember Last Year’s End 24-25 

of March? 

• US: Setup For Auctions With 26-27 

Spread Curve Flatteners 

• MBS: Staging a Comeback! 28-31 

• EUR: Risk of Pressure on Term 32 

Liquidity 

• EUR: Dislocation? Not Really 33 

• EUR: Portugal Coming Closer to 34-35 

the EFSF 

• EMU Debt Monitor: CDS, RV 36-41 

Charts, Trade ideas, SSA & 

Covered Bonds, Redemptions, 

• EUR Vol: Rate Hike without a Vol 42-43 

Rally? 

• JGBs: Several Factors to Weigh 44 

• JGBs: Trade Recommendations 45-46 

• Global Inflation Watch 47-50 

• Inflation: Cash and Carry 51-54 

• Technical Analysis 55-56 

• Trade Reviews 57 

FX Strategy 

• Strategy: JPY Liquidity Boosts 58-62 

Global Assets 

• Technical Strategy: Dollar Decline 63-64 

Should Continue 

• Trading Positions 65 

Forecasts & Calendars 

• 1 Week Economic Calendar 65-68 

• Key Data Preview 69-75 

• 4 Week Calendar 76 

• Treasury & SAS Issuance 77-78 

• Central Bank Watch 79 

• FX Forecasts 80 

Contacts 81 

www.GlobalMarkets.bnpparibas.com 

• Commodities and equity markets have rebounded 

sharply from severe setbacks following the Japan 

earthquake. 

• Risk appetite remains supported first and foremost by 

global liquidity conditions. 

• The situation in Japan and MENA remains uncertain. 

However, in the absence of worse news on those fronts, 

the markets will refocus on upcoming economic data and 

comments from central banks. 

• Further improvements in US confidence and payrolls 

would be supportive of risky assets and weigh on 

Treasuries. 

• While the FOMC now sounds more upbeat on the 

economy, any near-term setback would likely lead to a 

steeper Treasury curve. 

• The current concerns in Ireland and Portugal will 

continue to support core EGBs in the short run. 

• The latest ECB comments suggest the intention to 

follow through on the early-March heads-up for a rate rise 

next month. 

• In the UK, the call for the first BoE rate hike remains 

very close due to the discouraging growth-inflation mix; 

the latter is set to weigh on sterling. 

• EUR weakness should develop against other currencies 

than the USD, which remains supported by liquidity 

conditions. 

Market Views 

UST 10y T-note Yield (%) 

2y/10y Spread (bp) 

EGB 10y Bund Yield (%) 


JGB 10y JGB Yield (%) 


Forex 

EUR/USD 

USD/JPY 

Current 1 Week 1 Month 

3.39 ↔↑ ↑ 

271 ↔↑ ↔↑ 

3.25 ↔ ↑ 

156 ↔↓ ↓ 

1.21 ↓ ↓ 

100 ↓ ↓ 

1.4200 ↔ ↑ 

80.91 ↔ ↑ 

IMPORTANT NOTICE. Please refer to important disclosures found at the end of 

this report. Some sections of this report have been written by our strategy teams 

(shown in blue). Such reports do not purport to be an exhaustive analysis and may 

be subject to conflicts of interest resulting from their interaction with sales and 

trading which could affect the objectivity of this report.

Market Outlook 

The panic mode did not 

last long but a number of 

risks remain 

Upcoming US payrolls and 

confidence report will be 

key for Treasuries 

Last week’s risk-off period proved to be short lived. Markets have partly – for 

some assets, fully – reversed the post-Japan earthquake flight-to-quality 

move. Though the situation in Japan and MENA remains uncertain, global 

liquidity conditions continue to support risk appetite. After a jump into the 30 

area, the VIX index has moved back below 20. 

In the US, we remain cautiously bearish on Treasuries, firmly sticking with 

our view that yields may gradually rise in the coming months. However, the 

short-term picture will prove challenging due to global risk events spooking 

markets. It’s worth noting that this week’s Fed buybacks have been met with 

more aggressive selling than usual. 

We expect the upcoming US payroll (1 April) growth to be solid but 

unspectacular (180k). Consumer confidence (29 March) has been very 

sensitive to external developments and the impact on stock and oil prices. 

This effect is not over but the FOMC has only recently improved its 

assessment of the economic situation. It is unlikely to change its assessment 

unless confidence effects become broader based and sustained. 

Upcoming confidence and payrolls reports to impact risk appetite 

1600 

1500 

1400 

1300 

1200 

1100 

1000 

900 

800 

700 

600 

Consum er Confidence (RHS) 

S&P 500 

99 00 01 02 03 04 05 06 07 08 09 10 

150 

140 

130 

120 

110 

100 

90 

80 

70 

60 

50 

40 

30 

20 

Increasing tensions on 

Portugal and Ireland… 

…are supporting core 

markets… 

Source: Reuters EcoWin Pro 

In Europe, the near-term focus is on the EU summit (today and tomorrow), 

with spreads having widened at the periphery. In Portugal, with the 

government failing to secure passage of its latest round of austerity 

measures in the lower house, the Prime Minister resigned. The probability of 

a bailout for Portugal (which we have long considered inevitable) has risen, 

but the current situation is very fluid. The path from where are today to 

assistance being provided by the IMF and the EU remains unclear. 

Irish bond yields have hit 10%, indicating that markets are pricing in 

insolvency risks. Ireland is more significant than Portugal in that its oversized 

banking sector can create significant negative spillovers when it runs into 

trouble. Spain, which had seen an impressive decline of its CDS spreads 

since January, has been alarmed by rating agencies considering 

downgrades of its banks. 

All this is happening as core countries see their room for manoeuvre and 

strike a deal reduced by populist trends. In Germany, Chancellor Merkel will 

have to renegotiate the funding of the ESM as the compromise reached at 

the last Summit and follow-up FinMin meeting has run into opposition even 

from lawmakers of parties that back her. In Finland, the 17 April general 

election may see the populist party 'True Fins' triumphing. 

Signs of stress have so far been limited outside Portugal and Ireland but 

current concerns will support core EGBs. The lack of resteepening of the 

Cyril Beuzit 24 March 2011 

Market Mover 

2 

www.GlobalMarkets.bnpparibas.com

…are supporting core 

markets… 

…and weighing on the 

euro 

benchmark curve shows that, if markets are taking into account potential 

risks, they are not as concerned as they were before. At this juncture, this 

context may prevail in coming days, offering core markets some support but 

not fuelling a strong bullish tone. We retain our constructive view on core 

EGBs and recommend trading from the long side. 

On spreads, it is worth noting that the market's assessment of risks is less 

elevated than it has been. This means that risk aversion could rise 

significantly if risks extend further. We see room for spreads to widen in the 

near term. This may prevent the flattening from developing significantly and 

exposes the back end of the curve to resteepening risks. 

The latest eurozone news is not good for the euro. However, global liquidity 

conditions have become even more supportive with the BoJ bumping 

liquidity into money markets and pushing this liquidity via JPY weakening 

intervention into global markets. Even in the US, recent housing market 

weakness has pushed back early rate-hike speculation. Strong liquidity 

conditions will keep asset prices supported and the USD on the back foot for 

the moment. This implies that EUR weakness should develop against other 

currencies than the USD. We recommend selling EURSEK, EURNOK and 

AUDEUR. 

Ireland and Portugal under the spotlight 

7 

6 

10 -Y ea r G ove rnm en t 

Bond Yield Spreads vs Germ any (% ) 

Ireland 

5 

Portugal 

4 

3 

Spain 

2 

1 

0 

Jul 

Sep Nov Jan 

09 

Ita ly 

Mar May Jul Sep Nov Jan 

10 

Mar 

11 

Close call on the BoE due to 

the poor growth-inflation mix 

JGBs to remain well 

supported into the new 

fiscal year 


In the UK, the timing of the first BoE rate hike remains a very close call. The 

worsening in the latest inflation data, coupled with confirmation from the BoE 

minutes that the MPC expects CPI inflation to exceed 5% y/y, reinforces the 

case for a rate hike at the May meeting. However, the minutes also showed 

that the committee is sensitive to news on the consumer and uncertainty 

about the durability of the recovery in activity indicators. We stand by our call 

for a hike at the May meeting, given the worsening news on inflation. 

Nonetheless, the increased risk of weaker activity data has made us more 

nervous. 

Sterling may have seen most of its rally. The advance since January was 

backed by rising nominal interest rate differentials while real yields have 

been declining. The discouraging growth-inflation mix suggests that real 

yields will stay low. Domestic demand weakness is likely as real income 

weakens. Unless the UK experiences a productivity growth boost – of which 

we have seen no evidence to date – real income will remain depressed, 

undermining sterling in the medium term. 

In Japan, equities plunged and JGB futures were bought up in the wake of 

11 March. With the help of emergency quantitative easing by the Bank of 

Japan and coordinated FX intervention, things seems to be calming 

somewhat. However, the headline risk remains high. Flight-to-quality 

considerations and the worsening economic outlook are likely to dominate 

sentiment in the near term. 

Cyril Beuzit 24 March 2011 

Market Mover 

3 


US: Stirred Not Shaken 

• The events in Japan are likely to produce a 

noticeable dip and recovery in US GDP growth 

in 2011. Limitations in supply will disrupt sales 

of autos and electronics. 

Chart 1: Share of Japan in US Trade 

• We forecast a slowing in GDP growth to 

1.5% in Q2 q/q saar from 2.3% in Q1. We then 

think consumers and businesses will make up 

for lost time in H2, with GDP accelerating to 

3.0% in Q3 and 4.0% in Q4. 

• Overall, the events in Japan are expected to 

reduce GDP growth by 0.2pp in 2011 while the 

rebound from the disaster should add 0.1pp in 

2012. 

• Japan is a relatively minor trading partner 

for the US, accounting for around 4.8% of all 

exports and 6% of imports. Japan plays a more 

significant role in the auto and advanced 

technology industries, where it accounts for 

13% and 7% of imports respectively. 


Chart 2: Japanese Motor Vehicles and Parts 

Imports as % US Total Imported Vehicles and 

Parts 

• Most of the impact of the Japanese 

earthquake on the US economy is temporary in 

nature and comes from supply-chain 

disruptions. 

• However, it is a supply shock that is likely to 

add to global inflationary pressures, which will 

sap a little from final demand growth on 

balance. 

• The wild card continues to be any hit to 

consumer and business confidence which could 

take a larger toll on international activity. 

• There are few implications for US monetary 

or fiscal policy, which will continue to be driven 

by domestic concerns. 


Chart 3: Auto Inventories on Hand Allow for a 

Decent Month of Sales in March 

A preliminary assessment of the impact of events 

in Japan on US economic growth suggests 

significant near-term supply chain disruptions 

The massive earthquake in Japan has wrought 

devastating human consequences in the world’s third 

largest economy. The rest of the world has looked on 

with sympathy and sadness as the Japanese bravely 

deal with the aftermath. The reaction in financial 

markets has swung between depression and 

euphoria. 

The reality is that the actual impact on economic 

activity inside and outside Japan will take time to 


assess. The best we can do is think clearly through 

the likely chain of events in coming months. 

Our economists in Japan estimate that the hit to GDP 

growth in Japan in 2011 will be close to 3pp relative 

Julia Coronado/Yelena Shulyatyeva 24 March 2011 

Market Mover 

4 


to their pre-earthquake forecast, followed by a boost 

in 2012 as reconstruction activity gathers 

momentum. The reduction in growth comes from: the 

direct destruction of productive capacity in the 

affected regions; a disruption in production across 

Japan owing to limitations in power supply; increased 

risk aversion; and a decline in sentiment among 

household and businesses. 

The near-term disruptions to production have the 

most direct near-term implications for the rest of the 

world through supply-chain effects. While Japan has 

not been a driver of global growth for some time, it is 

still a source for key inputs in the automotive and 

electronics industry. 

Despite the restarting of some production featured in 

recent headlines, our Japan economists suggest that 

many large industrial companies continue to deal 

with disruptive shortages and limitations that will not 

be resolved easily in the near term. We simply need 

to wait and see how disruptive reduced production 

proves to be to the global supply chain. 

We look for a modest reduction in US economic 

growth in 2011 but a notable impact on the 

contour over the year 

Japan’s importance as a US trading partner has 

steadily declined in recent years (Chart 1). The 

country currently accounts for just 4.8% of all exports 

and 6% of imports. A reduction in domestic demand 

in Japan will likely translate into only a small 

reduction in the growth of US exports. Imports are 

also likely to be disrupted owing to production 

interruptions, with the impact concentrated on autos 

and electronics. 

The role of Japan is still quite significant in the motor 

vehicle industry as Japanese motor vehicle parts 

account for 13% of the US’s total imported motor 

vehicles and parts (Chart 2). The impact on auto 

availability will go beyond reduced availability of 

Japanese vehicles. For example, General Motors 

has announced the shutdown of plants in the US and 

Europe owing to reduced availability of Japanese 

parts. 

Auto parts are often model-specific, making it difficult 

to shift to other suppliers at short notice. The nearterm 

impact on auto sales will be mitigated by 

inventories on hand. The severity of the impact will 

therefore depend on how long the disruptions to 

Japanese production persist. 

US auto sales for March will be released next week 

and are likely to be largely unaffected by the 

interruptions in auto production following the 

Japanese earthquake. Auto sales had risen above 

13mn units saar in February on aggressive pricing 

Chart 4: Auto Pricing May Dampen Sales 



Chart 5: High Tech 

and improved consumer confidence and most 

analysts are looking for a March reading near 

February’s. Automakers have healthy levels of 

inventory on hand and can easily meet near-term 

demand (Chart 3). Beginning in April, US consumers 

are likely to see reduced model availability. Ward’s 

Automotive, a leading industry research organisation, 

suggested that supply limitations “almost certainly 

will put the brakes on April incentives, which will 

likely drive out price-conscious buyers who recently 

returned to the market”. It is looking for the pace of 

sales to drop “dramatically” in April, with continued 

sub-par sales likely to persist for a number of 

months. Demand for autos will be hurt by three 

factors: 

• Reduced availability of certain makes and 

models will reduce sales as some consumers will 

be unwilling to substitute to other models and will 

prefer to wait. Some substitution will likely occur, 

a development that could favour domestic 

producers, but such substitution is likely to be 

less than one for one. 

• The second factor hurting sales will be firmer 

pricing. With severe supply shortages, 

automakers will simply not need to offer the 


Market Mover 

5 


aggressive incentives they have rolled out of late 

to clear their inventories. We expect an impact 

on pricing similar to what we saw during the 

bankruptcy of two of the big three US 

automakers (Chart 4). During that episode, the 

lack of positive profit margins led to firmer prices 

as automakers simply did not have the capacity 

to compete on price. This was a significant factor 

keeping sales subdued as consumers can simply 

extend the life of their current vehicle in many 

cases and wait for better pricing to return. 

• The third factor that will crimp sales is soaring 

gasoline prices. Japan specialises in the 

production of fuel-efficient models and engines. 

The lack of availability of these models and 

higher retail prices will be hitting just as gasoline 

prices will be reaching levels not seen since 

2008. 

Many consumers are likely to simply wait and see 

how these factors evolve before committing to a 

significant auto purchase. 

Autos and other durable goods have a powerful 

impact on consumer spending growth. The 

acceleration in consumption from 2.4% q/q saar in 

Q3 to 4.1% was entirely accounted for by a 21% 

surge in durables spending. Even if we were to see 

auto sales return to their Q4 2010 average of 12.4mn 

units in Q2 2011 from what is likely to be an average 

13.1mn pace in Q1, we could see a flat reading on 

consumer spending growth. 

We have reduced our forecast of real growth in 

consumption to 1.0% q/q saar. Consumer and 

business electronics are expected to be affected by 

some lack of availability in Q2 as well, and overall 

growth will suffer from a drag from inventories. 

Partially offsetting these factors should be a boost 

from trade as imports sag. On balance, the aftermath 

of the Japanese earthquake should bring a dip to 

1.5% q/q saar in US GDP growth in Q2 2011. This 

will be reflected broadly across economic indicators 

including the ISM indices, consumer confidence and 

retail sales. 

We then expect consumers and businesses to make 

up for lost time in spending and restocking in H2 

2011, with growth accelerating to 3.0% in Q3 and 

4.0% in Q4. The wild card will be how well business 

and consumer confidence hold up. We do expect 

some softening in the pace of hiring in Q2 but for the 

labour market to stay on a solid track. The labour 

market will be key to how markets interpret any 

sluggish numbers on activity. 

Policymakers are likely to continue along a 

gradual path toward normalisation 

In our baseline scenario, the US economy is stirred 

but not shaken. As in 2010, global events will lead to 

a soft patch from which the US economy will recover. 

Last year, the soft patch was accompanied by an 

aggressive accommodation from the Fed. 

However, this year, we expect the Fed to continue 

along its path toward gradual removal of policy 

accommodation. We think the Fed will end QE2 in 

June and hold the balance sheet steady by 

reinvesting the roll-off of the mortgage portfolio 

through at least September before allowing a gradual 

shrinking of the balance sheet and beginning a 

soaking up of excess reserves through reverse repos 

and the term deposit facility in early 2012. We 

continue to think the first rate hike will come in June 

2012. 

The US economy is clearly in a better place than 

when we hit the soft patch last year, and global and 

domestic inflationary pressures point to the need for 

a gradual normalisaton of policy. Of course, 

uncertainties abound and the Fed will remain nimble 

– although the potential for inflation to be a 

constraining factor has risen. 


Market Mover 

6 


Japan: Fiscal Sustainability Now 

• If the financial markets were seriously 

worried about fiscal sustainability, the long-term 

interest rate would be rising and the yen 

weakening. 

• But in the week after the earthquake/tsunami 

term rates fell, the yen strengthened and share 

prices tumbled. 

• That subdued term rates and yen 

appreciation can coexist with the huge public 

debt is because Japan has succumbed to 

deflationary equilibrium, whereby funds 

continue to flow towards ‘safe’ assets. 

• But the earthquake disaster could bring 

forward the time when the debt reaches critical 

mass. 

• The most effective way to ensure that 

financing reconstruction does not trigger a 

fiscal crisis is for the government to 

concurrently announce plans for reconstruction 

and plans for long-term fiscal restructuring. The 

government should also give up on its favoured 

projects such as generous child benefits and rechannel 

that funding towards reconstruction. 

• There is a danger that the BoJ will be 

pressed into supplying funds for reconstruction. 

If the financial markets believe the BoJ is 

monetising the debt, deflationary equilibrium 

may be replaced by soaring inflation, surging 

term rates and a tanking yen. 

Chart 1: Japan's Share of Global Production of 

IT Electronics (%, 2009) 

IT Solution Service 9% 

Communications equipment 

Computers and data terminals 

Other electronic devices 

Semiconductors 

Dis play devices 

Electronic parts 

AV equipment 

Source: JEITA, BNP Paribas 

14% 

20% 

22% 

22% 

23% 

40% 

44% 

Japan's share 

(includes overseas 

production) 

Others 

0% 20% 40% 60% 80% 100% 

Chart 2: Combined Central and Local 

Government Debt (% of GDP, FY) 

200 

180 

160 

140 

120 

100 

80 

60 

40 

20 

0 

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 

Source: Cabinet Office, BNP Paribas ** FY 2010 is our estimate. 

Doubts about Japan’s fiscal sustainability 

The massive earthquake/tsunamis that hit northern 

Japan on 11 March struck just as we were returning 

from the global forecasting meeting in New York. Our 

flight, in fact, was making its final approach to Narita 

Airport. However, after circling Narita several times, 

an announcement was made that we would be 

diverted to Nagoya. After landing at Nagoya, we 

were kept in the plane for roughly two hours, during 

which time we were inundated via BlackBerry with 

concerned messages from colleagues and clients. 

Beyond inquiries about our condition, we were 

repeatedly asked what the disaster (the Fukushima 

power station crisis was not yet known) meant for the 

Japanese economy and, especially, Japan’s already 

precarious fiscal condition. Questions included: 

Would the budget deficit swell even more if the 

disaster caused the economy to contract sharply, 

reducing tax receipts? Will the Kan administration 

have to forgo finalising plans in June for reforming 

social security, the single greatest cause of Japan’s 

chronic budget deficits? Will fiscal reform be further 

put off if the economy is weakened by the 

earthquake? Will the public debt snowball from the 

massive cost of reconstruction? With the public debt 

already at 180% of GDP, how will government 

spending on reconstruction be financed? With so 

many concerns about the fiscal ramifications of the 

earthquake, we address these concerns in this report. 

Disaster was actually followed by falling term 

rates, yen appreciation and weak share prices 

If the financial markets were seriously worried about 

the sustainability of Japan’s public debt, long-term 

interest rates would be rising and the yen weakening. 

But, contrary to the fears of some, what actually 

happened is that the week after the disaster saw 

Ryutaro Kono 24 March 2011 

Market Mover 

7 


term rates falling, the yen strengthening and share 

prices tumbling. 

Chart 3: Corporate Growth Expectations (real 

growth rate, %) 

While the drop in term rates, like the plunge in share 

prices, can be attributed to the market discounting 

economic deterioration from the earthquake, the 

yen’s strength – the cause of weak share prices 

owing to the damage to exporters’ earnings – could 

seem incongruent. 

7.0 

6.0 

5.0 

4.0 

3- Year Ahead 

5- Year Ahead 

Mechanism behind the yen’s appreciation 

As often evident in the financial markets, whenever 

uncertainties increase, there is a tendency to avoid 

risk assets in favour of safe assets. So did the 

disaster prompt a shift away from foreign currency 

and foreign-currency denominated assets with their 

relatively high risk in favour of the relative safety of 

the yen? 

Rampant speculation of such yen repatriation (by 

Japanese insurers to procure cash for payouts to 

policyholders, by Japanese banks to prepare for 

withdrawals, by corporations to prepare for 

emergencies) is deemed a cause of the yen’s recent 

appreciation. 

Whether there actually was massive repatriation or 

not is unclear but, in behavioural economics, what is 

important is the narrative justifying long positions on 

the yen – which act to bring about the expected yen 

appreciation. 

Will term rates remain subdued, even as the debt 

steadily grows? 

Even in the bond market, growing preference for safe 

assts (or speculation thereof) owing to heightened 

uncertainties, and not just bleak prospects for the 

economy, drove investors to buy government debt. 

Seeing how the cost of reconstruction will inevitably 

add to Japan’s already-huge public debt, will doubts 

of fiscal sustainability at some point prompt investors 

to dump JGBs and the yen? 

Disconnect with Japan’s public debt 

There has long been a disconnect between Japan’s 

huge public debt and the trends in prices, the yen 

and term rates. For a country such as Japan, with its 

dangerously high public debt, one would normally 

expect to find a tanking currency, soaring interest 

rates and high inflation. Instead what we have is yen 

appreciation, subdued interest rates and deflation. 

As pointed out in previous reports, this is because 

funds continue to flow towards government bonds, as 

private sector demand for funding has not revived 

owing to continued deflationary expectations and the 

dim prospects for economic growth. In other words, 

government debt can be smoothly absorbed because 

3.0 

2.0 

1.0 

0.0 

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 

Source: Cabinet office, BNP Paribas 

540 

520 

500 

480 

460 

440 

420 

Chart 4: Nominal GDP (CY, JPY trn) 

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 

Source: Cabinet office, BNP Paribas 

private demand for funds is falling faster than debt 

issuance is increasing. 

Why subdued term rates and yen appreciation 

coexist with the huge public debt 

Because of lacklustre growth and deflation, tax 

receipts are not rising and the debt continues to 

expand. But the same lacklustre growth and deflation 

also keeps the long-term interest rate steady at low 

levels, thereby preventing Japan’s fiscal meltdown. 

Keeping the interest rate down is imperative for the 

authorities and market participants. A rising interest 

rate (for whatever reason) would cause debt 

servicing costs to soar, thereby increasing the risk 

that the debt will snowball out of control. Indeed, it 

seems as though Japan is choosing to forgo 

escaping from deflation and lacklustre growth in 

order to avoid a fiscal meltdown. As pointed out in 

earlier reports, because Japan has succumbed to a 

deflationary equilibrium of falling prices, super-low 

interest rates and weak growth, it is possible for 

subdued term rates and yen appreciation to coexist 

with the huge public debt. 


Market Mover 

8 


Bubble for safe assets creates deflationary 

equilibrium 

But the problem is that deflationary equilibrium is not 

a stable equilibrium and so will not last indefinitely. 

When the debt finally reaches critical mass, 

adjustments will begin in the form of a drop in real 

value and deflationary equilibrium will then be 

transformed into a new equilibrium. 

While some may feel that deflationary equilibrium 

can go on forever, the fact that that is not so 

becomes clear when we realise that the excessive 

preference for ‘safe’ assets (currency and 

government bonds) fostered by deflationary 

equilibrium has created a bubble for safe assets. 

Currently, owing to deflation, the real value at home 

and abroad of both the bonds issued by the 

government and the cash issued by the BoJ 

continues to rise. But the fact that these assets – 

ultimately only government-issued scraps of paper – 

acquire such added value makes them a kind of 

bubble. It is due to this bubble for the yen and 

government bonds that the yen strengthens, the term 

interest rate stays low and prices fall. 

Collapse of deflationary equilibrium 

Bubbles do not last, so when the bubble for safe 

assets bursts the reverse will occur. In other words, 

there will be a surge in inflation, tumbling bond prices 

(= soaring long-term interest rates) and yen 

depreciation. JGBs and the currency will revert to 

their pre-bubble price levels. 

While the severity of the adjustments will depend on 

the size of the bubble, if matters proceed to the point 

of critical mass for Japan’s public debt, the likely 

result will be higher inflation, a collapse in bond 

prices and huge currency depreciation. 

Deflationary equilibrium erodes the tax base 

We can also imagine the following. If the public debt 

is not reined in through rising inflation, tumbling bond 

prices and yen depreciation, then it could be adjusted 

using the proper means of tax increases and 

spending cuts. Unfortunately, the persistence of 

deflationary expectations and dim prospects for 

economic growth that keep private demand for funds 

stagnant also indicate that nominal GDP growth, the 

broadest measure of the tax base, will continue to 

shrink. 

Thus, with deflationary equilibrium eroding the tax 

base, it is unlikely that the public debt can be repaid 

through future tax receipts and spending cuts. 

Disaster could further swell safe-asset bubble 

If the current disaster has increased investor 

preference for ‘safe’ assets, the safe-asset bubble 

can be further inflated – bringing ever closer the 

moment of critical mass for the public debt. The 

downturn in the long-term interest rate could be a 

manifestation of further weakening of growth 

expectations. 

That said, reconstruction should trigger public-sector 

demand for funds over the intermediate term. Usually, 

when a nation’s capital stock is destroyed by war or 

disaster, the potential GDP level falls, while the 

potential growth rate itself is bolstered by 

reconstruction. Growth expectations could, therefore, 

pick up and the long-term interest rate could also rise 

somewhat. 

Critical mass for public debt brought forward 

The recent disaster has also created huge supply 

constraints for the Japanese economy. The disasterinduced 

economic contractions, therefore, do not 

only reflect weakened aggregate demand but also 

large-scale supply constraints brought about by the 

emergence of bottlenecks. 

Thus, it is possible that inflationary expectations 

could get the upper hand over deflationary 

expectations, resulting in higher long-term interest 

rates. If so, it might not be soon but the disaster 

could bring forward the time when the debt reaches 

critical mass. 

How to finance reconstruction 

Seeing how the public debt is a virtual time bomb 

with a fuse of unknown length, how should the 

country finance reconstruction? Some might feel that 

debt financing of reconstruction would not be a big 

problem provided it is an emergency one-off that is 

clearly predicated on repayment via future tax 

receipts. Such a view seems reasonable. 

But the government in its budget for FY 2010 and 

planned budget for FY 2011 already relies heavily on 

issuing debt to finance new permanent spending 

programmes. So the public may not readily support 

one-time emergency financing unless the authorities 

can fully explain it. 

Pork-barrel spending in the name of 

reconstruction cannot be allowed 

Care must be taken to ensure that reconstruction 

spending in the name of disaster relief does not 

include unrelated pork-barrel spending. For instance, 

after the Lehman shock, the authorities spent a huge 

amount of taxpayers’ money on coping with a ‘oncein-a-century 

crisis’, but those outlays included a lot of 

pork. So if a source of financing cannot be clearly 

secured, the government should forgo its child 

allowances and toll road reductions – budgetary 

items that the opposition parties adamantly oppose – 

and re-channel that funding toward reconstruction 


Market Mover 

9 


(revenue worth JPY 3.5 trillion could be secured by 

forgoing the DPJ’s favoured projects). 

Can’t plans for reconstruction and fiscal reform 

be concurrently announced? 

Of course, if the government announces its plans for 

reconstruction and long-term fiscal restructuring 

simultaneously, the market would not harbour doubts 

about Japan’s fiscal sustainability. Announcing both 

together would be the most effective way to ensure 

that the unveiling of one policy to counter a crisis 

(reconstruction) does not trigger another crisis (fiscal 

meltdown). 

If doubts about fiscal sustainability mount, the 

financial system will inevitably be shaken owing to 

the huge JGB holdings of most domestic financial 

institutions. Some might question the feasibility of 

realising credible plans for fiscal reform at this time of 

crisis. However, the very fact that this is the worst 

crisis since WWII should make it possible for 

politicians of all stripes to put aside their partisan 

differences and work together for the good of the 

country. 

Danger of financing by BoJ 

In closing, we want to express our concern that the 

BoJ could be pressed into supplying funds to finance 

reconstruction. On 14 March, the BoJ moved to 

double the size of its outright asset purchasing 

programme introduced last October. Thus, in the 

event the government issues bonds to pay for 

reconstruction, we suspect that some might feel that 

the BoJ should support this by buying such debt. 

Seeing how Japan faces a national emergency, more 

and more politicians would probably concur. (The 

media, in fact, are already suggesting this kind of 

BoJ cooperation.) 

Consequences of monetisation 

Regardless of the label, government bonds are 

government bonds and the purchasing of same by 

the central bank constitutes monetisation. 

Monetisation could cause bonds and the currency to 

lose value, resulting in high inflation, soaring term 

interest rates and a plunging yen. History has shown 

that, all too often in Japan, emergency measures end 

up morphing into routine policy. Voters should not 

forget that the BoJ started underwriting government 

debt during the Great Depression as an emergency 

measure. Of course, our concerns will be groundless 

if reconstruction is undertaken alongside a credible 

package of fiscal reforms. 

Without credible fiscal reform, support from the BoJ 

would be very dangerous. If the financial markets 

believe the BoJ is monetising the debt, deflationary 

equilibrium will instantly end – to be replaced by 

soaring inflation, surging term rates and a tanking 

yen. We must not let policies to counter one crisis 

create conditions for another. 


Market Mover 

10 


Japan: When Will Power Rationing End? 

• Japan is in for two more quarters of 

contraction, triggered not by the usual demand 

shock but by supply constraints. 

• Tepco’s power generation for the Kanto 

area, down 25%, will constrain the supply of 

goods and services in areas unaffected by the 

earthquake. Meanwhile, the disrupting of supply 

chains has put manufacturing at risk of grinding 

to a halt. 

• Whether or not the blackouts will really end 

in April is key. According to our calculations, 

the recovery of two of Tepco’s four damaged 

thermal power plants by April should allow 

electrical capacity to cover demand in May and 

June. This suggests rationing could indeed end 

as scheduled. 

• But demand for power will again exceed 

capacity in the summer and winter. Tepco is 

striving to cope by acquiring gas turbine power 

generation systems, which should help alleviate 

the power shortage in Q3. 

Economic slowdown will be due to supply shock 

Because of the bottleneck of insufficient electrical 

power and disrupted supply chains, Japan is in for 

two more quarters of negative growth (-4.0% 

annualised in Q1 2011 and -10.0% in Q2 on our 

forecasts). While weakening national sentiment will 

certainly weigh on aggregate demand, the economic 

slowdown this time will largely be due to supply 

constraints. In this sense, the slowdown will be like 

none in recent memory in that it will not be triggered 

by a demand shock. 

Supply constraint of insufficient power 

For starters, beyond the damage to production 

activities in the quake-hit Tohoku region, the supply 

of goods and services in the Kanto region – the 

economic heart of the country comprising the 

prefectures of Tokyo, Ibaraki, Tochigi, Gunma, 

Saitama, Chiba, Kanagawa, Yamanashi, and part of 

Shizuoka – will be severely constrained by the 

diminished supply of electricity. 

Power generation by Tepco (the company supplying 

the Kanto region) is down roughly 25%, meaning 

daytime rolling blackouts on weekdays will have to 

continue. This imposes a great burden on factory 

operations as production lines have to be shut down 

each time blackouts occur, and some companies 

have suspended operations entirely as quality would 

be affected by momentarily stopping operations. 

Chart 1: Expected Power Demand in Tepco's 

Service Area (million kW) 

70 

60 

50 

40 

30 

20 

10 

0 

March 

April 

May 

June 

July 

August 

Source: Tepco, BNP Paribas 

Note: Expected power demand is average for last two years. 

Chart 2: Expected Power Demand versus Power 

Capacity (million kW) 

70 

60 

50 

40 

30 

20 

10 

0 

March 

April 

May 

June 

July 

August 

Some factories in the area affected by power 

rationing thus remain inoperative all day long. That 

said, because companies can regulate their 

operations as they deem fit, including running 

production lines at night when power demand 

declines, and department stores and other retailers 

also have leeway to adjust their operating hours, the 

damage to economic activity might be limited. 

Disrupted supply chains stall manufacturing 

Manufacturing in particular, with its well-developed 

and tightly managed supply chains, is at risk of 

grinding to a halt if supplies run out. This could 

constrain economic activity in areas and sectors not 

affected by power rationing. Of course, with effort 

and ingenuity in finding new suppliers and/or shifting 

production to unaffected areas, the problems of 

bottlenecks and disrupted supply chains can be 

September 

September 

October 

October 

November 

November 

December 

Shortage 

December 

January 

January 

Power capacity 


Note: Expected capacity is based on Tepco estimates and other sources. 

February 

February 

Ryutaro Kono/ Makiko Fukuda 24 March 2011 

Market Mover 

11 


overcome, but it will take time before conditions 

return to normal. 

End of power rationing should allow a return to 

growth in Q3 

The Kanto area did not sustain significant earthquake 

or tsunami damage, so infrastructure and capital 

stock are essentially intact. Thus, economic activity 

in the area should quickly return to normal levels 

once the rolling blackouts end. Tepco has indicated 

that its rolling blackouts will stop at the end of April. 

If this turns out to be the case, we believe the 

economy will return to growth in Q3 (5.9% 

annualised in Q3, 10.5% in Q4 and 1.9% in Q1 2012) 

on the back of reconstruction demand. But owing to 

the expected contractions in Q1 and Q2, growth in 

2011 overall will be negative: our forecast is -0.9%. 

Will blackouts really end in April? 

Whether the blackouts will really end in April or not 

depends on the state of power generation at that 

time. Currently, four of Tepco’s thermal power plants 

are out of operation: Hirono plant in Fukushima, 

Hitachinaka and Kashima plants in Ibaraki, and 

Higashi Ohgishima plant in Kanagawa. According to 

Tepco, operations should resume at Higashi 

Ohgishima in March and at the Kashima plant in April. 

Damage at the other two plants was more extensive 

so repairing them will take more time. 

Based on Tepco’s maximum capacity and estimates 

of likely demand (past two-year average), the return 

to operations by the Higashi Ohgishima plant will 

mean that the electricity shortage in April won’t be as 

bad as in March. Nevertheless, shortages will still 

exist, making continued rationing necessary. 

In May and June, assuming the plants in Higashi 

Ohgishima and Kashima are generating at maximum 

capacity, generation should just cover expected 

demand. Thus, there is a good chance that rolling 

blackouts will indeed end in April. 

Power shortages likely in summertime 

The problem, however, is summertime electric 

consumption (Q3), when usage of power soars 

alongside rising temperatures. On our calculations, 

Tepco’s likely maximum capacity of 4.7 million kW 

will be exceeded by estimated demand of 5.7 million 

kW in July-August and 5.1 million kW in September. 

That means some form of rationing will probably 

have to resume. So unless something is done to 

cope with summertime demand for air conditioning, 

economic activity could again be constrained in Q3. 

What is more, demand for heating from December 

onwards could trigger another round of power 

shortages. Based on our calculation of Tepco’s 

capacity, we believe supply could be greater than 

first thought in Q2 but slightly less in Q3. 

Chart 3: Tepco’s Expected Power Demand and 

Power Capacity (million kW) 

*Electric sales 

(billion kw) 

*Electric 

demand 

*Expected 

capacity 

Shortage 

March 237.3 50.1 34.0 -16.1 

April 243.0 42.9 40.0 -2.9 

May 222.7 43.0 44.0 1.0 

June 218.7 45.9 46.0 0.1 

July 257.6 57.3 47.0 -10.3 

August 277.7 56.9 47.0 -9.9 

September 286.8 51.1 47.0 -4.1 

October 229.4 42.3 47.0 4.7 

November 222.0 47.4 47.0 -0.4 

December 229.1 48.9 47.0 -1.9 

January 263.8 51.3 47.0 -4.3 

February 50.3 47.0 -3.3 


Note: *Electric sales: Figures for 2010, forecasts for 2011. 

* Expected power demand is average for last two years. 

* Expected capacity is based on Tepco estimates and other sources. 

Chart 4: Tepco's Suspended Power Operations 

Location 

Total 

capacity 

(million kW) (Share) 

Termal power 

Fukushima 

3.8 (5.9%) 

Ibaraki 

1.0 (1.6%) 

Ibaraki 

4.4 (6.8%) 

Kanagawa 

2.0 (3.1%) 

Nuclear power 

Fukushima 

4.3 (6.6%) 

Fukushima 

4.4 (6.8%) 

Total 19.9 (30.8%) 

Tepco's total maximum capacity 64.5 


Tepco to acquire new gas turbine power 

generation systems 

Meanwhile, Tepco has announced plans to acquire 

gas turbine power generation systems to ease the 

electricity shortage expected this summer. If the new 

systems are those that generate 300k kW, setting up 

the new power stations should be easy they should 

only take a few months to construct. Bringing these 

systems online should help alleviate the power 

shortage in Q3. 

Power cannot be transferred throughout Japan 

If power could be transferred from parts of Japan 

unaffected by the disaster, the electricity shortage in 

the Kanto area could be eased. Unfortunately, this is 

easier said than done because AC power 

frequencies are not the same throughout the country 

(Japan is the only country to use both 50Hz and 

60Hz). In Japan, the western part of the country 

(Kansai area and west) uses 60Hz and the eastern 

part (Kanto area and east) uses 50Hz. 

While there are a several substations that can 

convert between frequencies and transfer electricity 

from Kansai to Kanto, their capacity to do so is 

limited to only 1-1.2 million kilowatts; the shortfall is 

10 times that. 

Ryutaro Kono/ Makiko Fukuda 24 March 2011 

Market Mover 

12 


Global: Supply Chain Disruptions 

• We present below stories on supply-chain 

disruptions caused by the Japan earthquake 

which have appeared in the media since 11 

March. 

• Although some companies have resumed 

production in Japan, the impact of the disaster 

will be longer lasting for others. 

note, as the stories below show, some companies 

have resumed their operations over the past week or 

started to boost production in the factories located in 

unaffected areas in Japan. However, there is also 

evidence that that the negative impact of the 

earthquake will be long-lasting for some other 

companies, with some saying that they are 

considering temporarily shifting production overseas. 

• In the rest of the world, supply chain 

disruption is causing delays or cuts to 

production and poses upside risks to prices. 

Following Japan’s earthquake/tsunami on 11 March, 

one of the major concerns is the impact of these 

events on global economic activity. In the last issue 

of Market Mover (17 March 2011), the economics 

team published a number of articles assessing the 

economic impact of the developments in Japan on 

other parts of the world. 

In this piece, we focus on the anecdotal evidence of 

the effects on the supply chain. The earthquake and 

the tsunami have caused significant disruptions to 

the power supply and logistics generally in Japan. 

Given Japan is a key supplier of hi-tech products, 

this points to possible spillovers to other economies 

being considerable. 

In the box below, we present some stories that have 

appeared in the media over the past two weeks 

regarding the impact of the Japanese events on the 

supply chain, production and prices. On a positive 

In the rest of the world, there is evidence that supply 

chain disruption is causing delays or cuts to 

production. The decisions of some car manufacturers 

to cut output of vehicles in the US and Europe (or 

discussions on doing so) are just some to quote. On 

the prices front, there are already concerns that 

supply disruptions could drive prices of key 

technology parts and consumer electronic goods 

higher. 

Overall, anecdotal evidence supports our view that 

this is a shock to supply as well as demand, for the 

rest of the world. Supply chain disruptions look 

severe and greater than for past natural disasters. 

Supply disruptions may lead to some substitution for 

other countries’ products (which in itself suggests the 

negative impact on global growth would be reduced). 

However, such disruptions are affecting the ability of 

companies elsewhere to produce goods. It is difficult 

to gauge the magnitude of these at this stage, but the 

direct and indirect effects of the Japanese 

earthquake will reduce global growth this year in our 

view. 

Box 1: Anectodal Evidence of the Impact of Japan Quake on Supply Chain and Production 

Japan 

• The Samsung/Toshiba factory in Yokkaichi, which supplies over 40% of the world's NAND flash and DRAM chips, was 

stopped during the earthquake. But it is now back up and running. (14 March, electroiq.com) 

• The prospect of extended supply disruption caused by Japan's earthquake drove prices for key technology parts higher. (16 

March, canada.com) 

• Fuji Heavy Industries Ltd. said that it will soon restart production of some autoparts at Gunma Prefecture factories. (21 March, 

nikkei.com) 

• Toyota Motor Corp. is considering halting domestic production of completed vehicles within the week due to the difficulty of 

procuring parts in the wake of the earthquake. The automaker has yet to set a production schedule beyond 28 March, though 

it has resumed domestic production of parts for overseas use. (22 March, nikkei.com) 

• Sony Corp. said it has partially resumed production at a lithium-ion battery plant operated by Sony Energy Device Corp in 

quake-hit Tochigi Prefecture. But production lines will be suspended until 31 March at five plants. Sony said it will consider 

shifting production to overseas plants temporarily if the parts shortage continues. (22 March, nikkei.com) 

• Production has stopped at roughly 70% of domestic plants that produce zinc. (22 March, nikkei.com) 

• Hitachi Chemical Co., which controls more than 40% of the global market for a negative electrode material for Li-ion batteries, 

has been forced to halt operations at a plant in Ibaraki Prefecture. (22 March, nikkei.com) 

• Panasonic Corp said it has resumed operations at its Koriyama plant in Fukushima Prefecture. (23 March, nikkei.com) 

• Fujitsu Ltd. said it has resumed some operations at one of its chip-manufacturing factories in quake-struck northern Japan. 

(23 March, nikkei.com) 

Gizem Kara/Hiroshi Shiraishi/Mole Hau/Bricklin Dwyer 24 March 2011 

Market Mover 

13 


Asia Ex-Japan 

• Semiconductor makers in Taiwan face a "fight to get raw materials" as 50% of the world's silicon wafer stock comes from two 

Japanese firms, Shin-Etsu and Sumco Corp., both affected by the quake. (14 March, pcworld.com) 

• Taiwan-based digital camera makers Altek and Ability pointed out that they have already confirmed deliveries with their 

Japan-based upstream CCD suppliers and are currently seeing no shortages in short-term supply. However, longer term, 

suppliers could see issues from their own upstream material suppliers, as well as problems with transportation and power. (14 

March, digitimes.com) 

• Automobile production is continuing as usual at the three Toyota Motor Thailand (TMT) factories. (15 March, 

aseanaffairs.com) 

• STATS ChipPac said delivery schedules could be affected if the logistics pile-up in Japan drags on. (16 March, 

businesstimes.com) 

• "A prolonged abnormalcy in Japan will certainly affect the material supplies . . . as, incidentally, most of the electronics 

industry locators in the Philippines are Japanese-owned companies," Ernesto Santiago, Semiconductor and Electronics 

Industries in the Philippines Inc. President, said. (16 March, aseanaffairs.com) 

• Malaysian state oil firm Petronas said it will supply extra LNG to Japan after the earthquake forced the shutdown of several 

nuclear power plants, prompting increased demand for gas. (19 March, topix.com) 

• GM Korea Co. said that it will reduce production to prepare for a possible lack of automotive parts from Japan, following a 

similar decision by Renault SA's subsidiary in South Korea. (21 March, WSJ) 

• Chinese Dongfeng Automobile, which set up a joint venture with Nissan, imports most of its auto components from Japan. An 

insider said inventory will run out by end of March and production will be halted by then. (21 March, stock.591hx.com) 

• Chinese Shenzhen Success Electronics Co., which is a producer of LCD, imports LCD glass substrate, polarized glass and 

some electronic components from Japan. The company said the logistics bottleneck may affect the delivery schedule and that 

they can purchase polarized glass and other electronic components from South Korean, Taiwanese and mainland suppliers. 

(21 March, stock.591hx.com) 

• Chinese TCL corporation invests in a programme to produce liquid crystal panels. 80% of its manufacturing equipment relies 

on imports from a Japanese producer called AGC. Due to the disruption to Japanese logistics, the company said the whole 

program will be delayed. (21 March, stock.591hx.com) 

• Indonesian coal shipments to Japan are being redirected to China because of delays and damage at ports. (22 March, 

thejakartaglobe.com) 

• Local auto assemblers in Philippines are facing delays in their supplies of completely built-up vehicles and assembly parts 

from Japan. (22 March, mb.com) 

• US solar power companies are among those facing disruptions to supply. (14 March, Reuters) 

• Apple Inc.'s iPad 2 tablet may run into supply problems, as some hard-to-replace parts come from Japan. (18 March, 

nikkei.com) 

• General Motors has been forced to close its Shrevesport, Louisiana facility due to supply problems. (18 March, 

ewallstreeter.com) 

US 

• Boeing Co. officials said they are working out how to deal with possible airplane-parts shortages from suppliers in Japan. (18 

March, WSJ) 

• Caterpillar Inc. said disruptions in its supply chain in Japan could sporadically affect the company's assembly plants 

elsewhere in the world. (18 March, WSJ) 

• Honda is suspending May orders for Japan-made vehicles from U.S. dealers. (19 March, WSJ) 

Europe 

• The price of consumer electronic goods such as computers, mobile phones and DVDs could rise across the world due to 

shortage of electronic components from Japan. (16 March, guardian.co.uk) 

• The British arm of Honda said it was operating normally, although there are wider concerns in the industry about supply 

shortages. (16 March, guardian.co.uk) 

• Swedish group Ericsson said that although it expects its supply of components to be affected, it does not expect a material 

impact on its Q1 2011 sales. (16 March, supplychainstandard.com) 

• Peugeot has started to reduce production of diesel cars, due to a lack of Hitachi-made electronic components. However, the 

Hitachi factory has recently restarted production at a slow pace. (22 March, latribune.fr) 

• General Motors Co., Toyota Motor Corp. and PSA Peugeot-Citroën have cut or are making plans to curb output of thousands 

of vehicles in the US and Europe due to concerns about a shortage of critical parts made in Japan. (24 March, WSJ) 

Source: The date and sources are in parentheses after each story. 

Gizem Kara/Hiroshi Shiraishi/Mole Hau/Bricklin Dwyer 24 March 2011 

Market Mover 

14 


Eurozone: Holding Firm 

• The sentiment surveys for March released to 

date show little adverse impact from the recent 

run of unfavourable news. 

• Regarding the spillovers from the problems 

in Japan, there may be lags until the disruption 

to supply chains becomes more evident. 

• Price developments in the surveys show a 

continuation of the elevation of input costs and 

further signs of pass-through. 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

Chart 1: French PMI & Growth 

Composite PMI: 

Output (RHS) 

70 

65 

60 

55 

50 

45 

40 

• In addition to the data flow, recent speeches 

suggest that the ECB is likely to follow through 

on its ‘heads up’ for a rate rise in early April. 

-1.5 

GDP % q/q 

35 

-2.0 

30 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Chart 2: German PMI & Growth 

Strong surveys… 

The recent run of surveys across a number of ‘core’ 

eurozone countries have shown sentiment holding up 

remarkably well given the flow of adverse news over 

the last few weeks. 

2.0 

1.0 

0.0 

Composite PMI: 

Output (RHS) 

65 

60 

55 

50 

In France especially, the data have been remarkably 

strong. The monthly business sentiment index from 

INSEE rose by three points in March to 109, its 

highest level since March 2008. The sub-index of 

‘own company’ output expectations, which is typically 

a good guide to actual output growth trends, jumped 

from +17 to +25, its strongest level since late 2000. 

The sub-index of orders from overseas also rose 

strongly in March. 

Echoing the INSEE survey, the French 'flash' PMI for 

March also came in strong. The composite index for 

output rose from 59.0 to 59.6, a whisker away from 

its cycle peaks over the past decade (Chart 1). The 

PMI is a pretty good gauge of growth momentum but 

it has tended to over-state growth since the financial 

crisis. The PMIs for services (from 59.7 to 60.7) and 

for manufacturing (from 55.7 to 56.6) both showed 

improvement relative to February. 

…in the core of the eurozone… 

In big-picture terms, Germany's 'flash' PMI data for 

March were pretty similar. The composite PMI output 

index came in at 60.6, down a little from 60.9 in the 

prior month, but still consistent with unusually strong 

growth. As we have been stressing for a long while 

now, the 0.4% q/q rise in German GDP in Q4 last 

year was not representative of the underlying growth 

momentum in Germany. Our forecast for Q1 GDP is 

a q/q increase of 1%, more in line with the signals 

from the composite PMI (Chart 2). 

-1.0 

-2.0 

-3.0 

-4.0 

20 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


GDP (% q/q) 

The German PMIs continue to highlight the broaderbased 

nature of the expansion, another recurring 

theme of our analysis. The services PMI rose to 60.1 

in March, not far short of its manufacturing sibling, 

which slipped to 60.9. The German economy is very 

sensitive to external developments but domestic 

demand is playing an increasingly important role in 

the strength of German growth. 

…with Germany’s labour market tightening 

A striking difference between Germany and other 

countries, including the US in particular, is the state 

of the labour market. The composite PMI’s sub-index 

for employment in Germany rose to a record high in 

March (of 57.4). 

The manufacturing PMI’s sub-index for employment 

is at an exceptionally high level. At 60.6 in March, it 

is indicative of a further strong rise in the demand for 

labour in the sector (Chart 3), at a time when labour 

shortages are already being reported. 

45 

40 

35 

30 

25 

Ken Wattret 24 March 2011 

Market Mover 

15 


Divergence continues 

At the eurozone level, the 'flash' PMI data for March 

showed activity across sectors is still very elevated 

but less spectacularly so than in France and 

Germany. This points to considerable divergence 

between the conditions in the core and periphery, 

which will be evident in the complete national 

breakdown of the PMI figures early next month. 

Despite the divergence, the eurozone service sector 

PMI for March was robust at 56.9, its highest level 

since August 2007. The manufacturing PMI, in 

contrast, slipped from 59.0 to 57.7 but this is a pretty 

strong reading nonetheless. Given the softening in 

the manufacturing data, the composite PMI for the 

eurozone lost some ground in March but at 57.5, it is 

still indicative of q/q GDP growth of at least twice the 

rate seen in Q4 last year (of 0.3%). 

Lagged effects 

In sum, there appears to be little disruption so far to 

the improvement in eurozone economic conditions 

which has been evident since last autumn. Note that 

the survey period for the PMI figures this month ran 

from 11 March onwards, the day of the earthquake in 

Japan, so the data ought to be an accurate reflection 

of activity trends. 

That said, it is too soon to conclude that there will be 

no disruption from developments in Japan. Lags may 

be an issue given the nature of the problem. The 

potential disruption to supply chains due to output 

shutdowns in Japan may take a while to show 

through as companies are able to use their existing 

inventory for the time being. Either way, the fact that 

the data remain so strong suggests that the damage 

to confidence from events in Japan, and in the MENA 

region, has been very limited to date. 

Price pressures 

The survey data on the activity side have reinforced 

the markets’ (and our own) belief that the ECB is 

likely to go ahead with its proposed policy tightening 

next month. The relationship between the composite 

PMI and policy changes is a pretty solid one and the 

PMI is clearly in the tightening zone (Chart 4). The 

same is true on the pricing side of the surveys. 

The input price sub-index of the eurozone composite 

PMI rose for the sixth straight month in March and is 

a whisker shy of its record highs. The output price 

sub-index went sideways in March but it too remains 

elevated by past standards. There has been only one 

month in the history of the series in which the output 

price sub-index of the PMI has been higher than its 

current level (in July 2008, when the ECB opted to 

hike rates with inflation well above target and inflation 

expectations high and rising). 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

-6 

Chart 3: German PMI & Employment 

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Employment in Industry (% y/y) 

Manufacturing PMI: Employment 

(RHS, 3Mth Lag) 

Chart 4: Composite PMI & Policy Changes 

0.50 

0.25 

0.00 

-0.25 

-0.50 

-0.75 

Change in Refi Rate (bp) 

-1.00 

35 

98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Composite PMI (RHS) 

The pricing surveys are particularly elevated in the 

manufacturing sector. While the input price sub-index 

slipped back a little in March, the level of 83.0 would 

have represented a record high in any other month 

but February. The manufacturing output price subindex, 

meanwhile, rose to yet another record high of 

61.4 in March, suggesting that there is some passthrough 

from higher input costs – a prominent cause 

for concern at the ECB. 

Rate rise on the cards 

The speeches from various ECB officials in the last 

few days have all pointed to the same conclusion. 

While the decision to raise rates has not yet formally 

been made, the assessment of the fundamentals in 

early March still applies. 

A common theme of some of the speeches has been 

the concern expressed over the potential adverse 

consequences of keeping interest rates too low for 

too long. This concern is unlikely to be extinguished 

by a sole 25bp rate rise, suggesting that the market 

is right to have re-priced in a series of hikes this year. 

The ECB staff inflation projections going forward are 

likely to support this conclusion. 

65 

60 

55 

50 

45 

40 

35 

30 

60 

55 

50 

45 

40 

Ken Wattret 24 March 2011 

Market Mover 

16 


Portugal: Towards the EFSF 

• The political crisis triggered by Mr Socrates’ 

resignation makes it virtually inevitable that the 

country will have to seek external financial 

support. 

Chart 1: Net Financial Assets (% GDP) 

• However, this is complicated in the short 

term, as the caretaker government has not got 

the mandate to negotiate the terms of a possible 

bailout. 

• The ECB will probably come to the rescue 

but markets will remain nervous. 

• It is encouraging that Spanish paper has not 

been greatly affected by the Portuguese crisis. 

• But the crisis is still a reminder of the 

consolidation effort required in a number of 

countries will be very challenging from a 

political point of view. 

• This leaves the eurozone bond markets 

vulnerable to further tensions, as consolidation 

fatigue sets in. 

Political crisis 

Following former Irish PM Cowen’s defeat at the 

February 25 Irish general election, the fiscal crisis in 

the eurozone took its second victim yesterday, as 

Portuguese PM Socrates was forced to resign after 

the parliament rejected the additional austerity 

measures proposed by his government. 

Mr Socrates’ resignation makes it virtually inevitable 

that the country will have to seek financial support 

from the EU and the IMF. The political crisis has 

proven how challenging it is to implement the needed 

measures to bring credibly the public debt back onto 

a sustainable path. A support package could help 

Portugal to bridge this credibility gap, acting as a 

constraint for the new government while buying it 

some breathing space on the funding side. 

Support package: the benefits 

As we argued in past research, a support package 

could in fact benefit Portugal to a great extent. Unlike 

for countries like Greece, Portugal’s problems do not 

stem directly from fiscal profligacy. The country 

implemented fiscal consolidation reasonably 

successfully in 2003-2007. The fiscal deficit in 2010 

is estimated at around 7% of GDP (albeit on the back 

of some one-off measures), against a deficit of 6.3% 

in the eurozone and 10.5% in the UK. The public 


debt is around 82.3% of GDP, compared with 84.1% 

in the eurozone on average. 

Portugal’s problems lie instead in a chronic lack of 

competitiveness, which led to a steady decline in the 

economy’s potential growth rate, an increasing level 

of household indebtedness and as result a rising 

level of external indebtedness (Portugal’s net 

international investment position shifted from -32% of 

GDP in 1999 to -106% of GDP in 2009, Chart 1). 

Against this backdrop, a credible plan of far-reaching 

structural reforms aimed at increasing Portugal’s 

growth potential is needed as much as aggressive 

fiscal consolidation. And here, the coercion 

potentially exerted by the EU/IMF conditionality could 

be of help, providing political room for plans that 

otherwise might be difficult to implement. An example 

of this is Greece where a number of structural 

reforms, unthinkable prior to the crisis, have been 

approved in a very short period of time. 

A support package is therefore not just very likely but 

also potentially beneficial. That said, there are a 

number of technical problems stemming form the 

political impasse the country finds itself in at the 

moment. 

Technical difficulties 

Following the PM’s resignation, the ball is now in the 

President’s camp. Mr Silva, the President of the 

Republic, after talks with political leaders and a 

number of advisors, will have to decide if there are 

the conditions to form another government, possibly 

with a limited mandate but with broader support from 

different political forces, or to go for early elections. 

At the time of writing, given the position taken by the 

main opposition party, the SPD, the latter appears 

the most likely outcome. 

Luigi Speranza 24 March 2011 

Market Mover 

17 


This presents Portugal with a technical problem. 

Elections cannot be called for at least 55 days, under 

the Portuguese law. Meanwhile, Mr Socrates would 

remain in charge of ordinary affairs. But according to 

most political commentators, a caretaker government 

would not have constitutional powers to ask for and 

negotiate the conditions of a support package. 

With redemptions looming, between April and June 

EUR 9.5bn worth of Portuguese bonds will expire, 

this impasse is a source of increased concern for the 

markets. Note that Portugal appears to be in position 

to refinance April’s redemptions (see: “EUR: Portugal 

Coming Closer to the EFSF”) but the refinancing of 

the June redemption is more troublesome. There are 

three possible alternatives: 

• First, the EU could still provide support, based on 

some informal agreement with the Portuguese 

authorities. But this is potentially damaging for the 

credibility of the EU fiscal framework. As the Irish 

experience has shown, the newly elected 

government once in power might want to 

renegotiate the terms of the agreement. This 

makes this option unpalatable; 

• Second, the EFSF could step in, buying 

Portuguese bonds on the primary market at the 

next auctions, something that the vehicle is able 

to do on the basis of the decisions taken at the 

March EU Summit. But this possibility is subject to 

‘strict conditionality’ in the context of a programme 

and therefore unlikely; or 

• Finally, the ECB might support Portuguese bonds 

through purchases in the secondary market, 

waiting for the outcome of the general election. 

This is the most likely scenario but would leave 

markets concerned that something might go 

wrong, causing volatility and possibly a further 

widening of the Portuguese bond spread over the 

next few days and weeks. 

Lessons from Portugal 

In a euro-wide context, two considerations are 

warranted. 

The first is that Spanish paper has held up very well. 

This is important, as spillovers of the Portuguese 

political crisis onto Spain would again raise the 

spectre of a systemic problem. A factor underlying 

this has been a shift in the attitude of EU leaders 

towards a more comprehensive approach to the 

fiscal crisis, supported by the decisions taken on the 

ESM which are likely to be ratified at 24-25 March 

EU Council. This is positive news. 

The second aspect is less encouraging and regards 

the lessons we can draw from the recent 

developments in Portugal. 

The difficulty encountered by Socrates’ government 

in passing the austerity measures agreed at the EU 

level is a reminder of the primacy of national politics. 

As we have often highlighted in the past, the 

consolidation effort required in a number of countries 

is very challenging, as it implies a very high cost in 

terms of lost output and jobs in the short term. With 

this, we are not questioning the need to implement 

the corrections, as in the absence of consolidation 

the fallout on activity might be even greater. But the 

short-term cost of the fiscal consolidation might prove 

to be socially and politically unfeasible. 

This is important especially in view of the new anticrisis 

mechanism that the EU Council is likely to 

approve today. As we have highlighted in previous 

research, the agreement struck amongst EU leaders 

implies an important shift underlying the nature of the 

financial support from 2013. Unlike for the EFSF, 

financial support from the ESM is subordinated to a 

debt sustainability analysis. In the case of solvency 

problems, private creditors will be required to 

participate, accepting some changes in the terms of 

payment that could take the form of a standstill, 

extension of maturity, interest-rate cut and/or haircut, 

depending on the specific case. In addition, the loans 

provided by the ESM will enjoy preferred creditor 

status, junior only to IMF loans. 

Against this backdrop, markets are likely to remain 

concerned that the planned adjustment in some 

countries could eventually fail, leading to some form 

of debt restructuring. This will leave the eurozone 

bond market vulnerable to regular tensions 

resurfacing. 

Conclusions 

In conclusion, recent events in Portugal raise at least 

three questions. The first is on the most likely 

evolution of the crisis in the short term. We believe 

that a request for external support in the context of 

an EU/IMF bailout programme is very likely. But the 

political stalemate created by Mr Socrates’ 

resignation might make this difficult in the short term. 

This means uncertainty is likely to persist on this 

front. The second issue regards the immediate 

spillover effects from the Portuguese crisis. The 

impact on Spanish paper has been limited to date, 

which is encouraging. The political shift towards a 

more comprehensive approach to the crisis 

continues to bear fruit. Finally, what lessons can we 

draw from the events unfolding in Portugal? Portugal 

provides fresh evidence that the cost in terms of 

output and jobs of the fiscal consolidation may 

eventually make the adjustment unfeasible from a 

social and political point of view. This is a risk 

looming elsewhere too, which leaves the eurozone 

bond market vulnerable to further tensions 

resurfacing. 

Luigi Speranza 24 March 2011 

Market Mover 

18 


UK Budget 2011: Tweaking at the Margins 

• The Budget was a package of micro 

measures that didn’t change the underlying 

thrust of the fiscal consolidation plan. 

Chart 1: GDP Forecast 2011 HMT vs 

Consensus, BNPP and BoE 

• Measures were judged to be fiscally neutral 

though at the margins the pace of discretionary 

fiscal tightening is slightly less aggressive than 

previously. 

• The level of public sector net borrowing was 

raised by around GBP 10bn per year from next 

year onwards. 

• Gilt issuance for the coming fiscal year was 

in line with our forecast, but around GBP10bn 

higher than consensus expectations. 

The Chancellor set out the big picture in the 

Emergency Budget last year. Osborne laid out the 

master plan of where the coalition government 

intends to steer the public finances over the next 4-5 

years and how it intends to get there. Today’s Budget 

was about fine-tuning, tweaking at the margins, but 

not changing the underlying thrust of the plan set out 

in 2010. 

It was unveiled as the “Budget for Growth” which 

rather looks at the situation with a glass half full. It 

was labelled the Budget for growth, but the growth 

projection was revised down! Fiscal policy is not 

going to boost growth – the biggest fiscal 

consolidation in a generation is going to be a huge 

drag on growth. Based on the updated OBR 

forecasts for government consumption and 

government investment there will be a 0.5 

percentage point subtraction from growth this year 

compared with 2010 – with precious little to offset 

that. A more realistic assessment is that this is a 

budget to minimise the drag from the fiscal 

consolidation. 

The Chancellor’s measures are essentially aimed at 

minimising the size of the fiscal multiplier. In other 

words, the aim is to minimise the reduction to GDP 

growth implied by each GBP1 reduction in 

government spending. That may help, but it doesn’t 

change the big picture which is the economy faces 

significant headwinds to growth from fiscal tightening. 

Key forecasts 

Table 2 shows how the key forecasts have evolved 

since the November-2010 Economic and Fiscal 

Update. To summarise: 

Source: Reuters EcoWin Pro, BNP Paribas, BoE, HMT 

Table 1: Key Forecasts 

2010 2011 2012 2013 2014 2015 

GDP % y/y 1.3 1.7 2.5 2.9 2.9 2.8 

CPI % y/y 3.3 4.2 2.5 2.0 2.0 2.0 

PSNB GBP bn -145.9 -122 -101 -70 -47 -28 

PSNB % of GDP -9.9 -7.9 -6.2 -4.1 -2.6 -1.5 

Cyc Adj PSNB % of GDP -7.4 -5.3 -3.7 -2.0 -1.0 -0.4 

1y-Chg In Cyc Adj PSNB 

% of GDP 1.5 2.1 1.6 1.7 0.9 0.6 

Source: HMT 

• The OBR’s growth projection was revised lower 

to 1.7% y/y for 2011 – fractionally lower than 

consensus, though still a little too optimistic in 

our view; 

• The OBR’s inflation projection was revised 

sharply higher; 

• The projection for net borrowing was revised up 

by a total of GBP 35bn over the next four years; 

• With regards to the economic context, the 

cyclically adjusted public sector net borrowing 

forecast was revised to show a slightly slower 

pace of fiscal consolidation. In the very near 

term, the structural deficit will narrow by 2.1% of 

GDP over the coming fiscal year compared with 

the 2.4% of GDP projected in November 2010. 

By the end of the parliament, the structural deficit 

is projected to be 0.4% of GDP, compared with 

0.0% previously. 

Key policy announcements 

Most of the key policy announcements were widely 

anticipated. The main measures were: 

• The planned increase from April onwards in duty 

on petrol has been abandoned. In addition, duty 

Alan Clarke/Shahid Ladha 24 March 2011 

Market Mover 

19 


will be reduced by 1p per litre immediately. A fuel 

price stabiliser has been introduced to pay for 

this – increasing the tax on oil companies when 

the price of oil is high – though reversed when 

the price of oil falls below USD 75 bbl; 

• Income tax personal allowance was raised by 

GBP 1000, in line with the plan set out in the 

coalition agreement; 

• Clampdowns on tax avoidance estimated to be 

worth GBP 1bn; 

• Delay the planned increase in air passenger duty 

scheduled for April, funded for by introducing a 

tax on private jets; 

• Reduce the corporate tax rate by an additional 

1pp (the rate will now fall by 2pp points rather 

than the 1pp previously announced); 

• The Bank levy will be adjusted higher so that 

banks don’t benefit from the lower corporation 

tax rate; 

• Support for entrepreneurs and small businesses; 

• Simplification of planning legislation; 

• Investigation into whether income tax and 

national insurance could be merged to simplify 

the tax system; 

• Introduce 21 enterprise zones; 

• GBP 250mn to support first time home buyers; 

• Support for research and development; and 

• A GBP 2bn increase in the resources available to 

the Green Investment Bank. 

To summarise, the Budget consisted of a package of 

micro-measures. The combined total of all 

discretionary measures over the next five years 

amounted to a GBP 30mn giveaway. 

At the margins, some of the measures should help to 

prevent a more protracted slowdown in growth. The 

reduction in fuel duty represents a slight easing in the 

burden on household real incomes and could reduce 

the drag on household consumption on growth this 

year. Similarly, the support for first-time buyers is 

potentially good news for the housing market. A 

similar programme in Australia some years ago 

helped to prop up house prices. In turn that could 

also reduce one of the headwinds to household 

consumption this year. That said, the size of the 

package is such that it appears to be limited to 

10,000 households, which would represent only 1k 

per month on mortgage approvals. If that is the case, 

it could be small beer. Much of the spin was on 

supporting small business. According to the 

Table 2: Evolution of Key Forecasts 

GDP % y/y 

2010 2011 2012 2013 2014 2015 

OBR (Mar-11) 1.3 1.7 2.5 2.9 2.9 2.8 

OBR (Nov-10) 1.8 2.1 2.6 2.9 2.8 2.7 

Change -0.5 -0.4 -0.1 0 0.1 0.1 

BNP 1.3 1.4 1.7 2.6 2 2 

Consensus 1.9 2.1 

CPI % y/y 

2010 2011 2012 2013 2014 2015 

OBR (Mar-11) 3.3 4.2 2.5 2.0 2.0 2.0 

OBR (Nov-10) 3 2.8 1.9 2 2 2 

Change 0.3 1.4 0.6 0 0 0 

BNP 3.4 4.7 2.4 1.8 2 2 

Consensus 3.9 2.1 

PSNB GBP bn 

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 

OBR (Mar-11) -145.9 -122 -101 -70 -47 -28 

OBR (Nov-10) -148.5 -117.5 -90.9 -60.2 -35 -18.2 

Change 2.6 -4.5 -10.1 -9.8 -12 -9.8 

BNP -146 -124 -105 -76 -58 -41 

Consensus -121 -98 

PSNB % of GDP 

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 

OBR (Mar-11) -9.9 -7.9 -6.2 -4.1 -2.6 -1.5 

OBR (Nov-10) -10.0 -7.6 -5.6 -3.5 -1.9 -0.9 

Change 0.1 -0.3 -0.6 -0.6 -0.7 -0.5 

Cyc Adj PSNB % of GDP 

2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 

OBR (Mar-11) -7.4 -5.3 -3.7 -2.0 -1.0 -0.4 

OBR (Nov-10) -7.5 -5.2 -3.3 -1.7 -0.5 0.0 

Change 0.2 -0.1 -0.4 -0.3 -0.5 -0.4 

1-y Change in Cyc Adj PSNB % of GDP 

2010-11 2011-12 2012-13 2013-14 2014-15 ave 

OBR (Mar-11) 1.5 2.1 1.6 1.7 0.9 1.6 

OBR (Nov-10) 1.3 2.4 1.8 1.7 1.1 1.7 

Change 0.2 -0.3 -0.3 0.1 -0.2 -0.1 

Source: HMT, BNP Paribas, Consensus Economics 

Federation of Small Business, these account for 59% 

of total employment and the vast majority of new job 

creation. However, the measures were as much 

about political spin as they were fundamental. A 

tweaking in the inheritance tax rules were a building 

block towards the Prime Minister’s flagship ‘Big 

Society’ initiative. 

Gilt issuance – funding via gilts at GBP 169bn in 

FY 10/11 

Table 3 displays the updated financing arithmetic. To 

summarise, the financing requirement for 2011-12 

remains GBP 169bn – unchanged from the 

November update. That was in line with our 

expectation for the full year, though around GBP 9bn 

higher than consensus expectations. The gilt market 

should be disappointed on the news. 


Market Mover 

20 


More shorts and inflation but less medium/longs 

In terms of instrument type, we will see an increase 

in shorts and index-linked gilts but a reduction in 

mediums and longs – all in the region of 2-2.5%. 

Despite the disappointment in the net funding 

requirements via gilts (being higher than expected), 

the market is rallying given lower medium and longend 

issuance. This is likely to be a temporary 

reaction and we keep our view of gilt 

underperformance ahead. 

With respect to distribution, FY 11/12 will see GBP 

132.8 billion in 47 outright auctions, GBP 31.6 billion 

by a supplementary programme of up to eight 

syndicated offerings and GBP 4.6 billion in a 

programme of sales via mini-tenders. In Table 5, we 

show the recent evolution of Gilt Distribution Method. 

Renewed issuance will weigh on gilts 

The onset of the new fiscal year (and a ‘full’ 

significant issuance calendar) will weigh on gilts 

especially with the low level of issuance in Q1 2011 – 

Chart 2. Furthermore, the lack of material predictable 

cashflow inflows (from coupon and redemption 

payments) before June at the earliest leave gilts at 

risk – particularly if there is no safe-haven bid from 

the eurozone (with core/non-core spreads 

tightening). We target 55bp on 10y Gilt/Bund 

spreads, vs. just above 30bp currently (an 18-month 

low). 

Table 3: Financing Arithmetic 

HMT Mar-11 2011-12 

CGNCR 120.4 

Redemptions 49 

Other 0 

Planned Short Term Financing Adjustment 0 

Financing Requirement 169.4 

Less Financing from NS&I 2 

Net Financing Requirement 167.4 

Financed by: 

Tbills -1.6 

Gilts 169 

Source: DMO 

Table 4: FY 11/12 Gilt Issuance vs. FY 12/13 

Sector Short Medium Long Linker Total % change 

2010/11 53 38 41 34 165 -27.0% 

2011/12 58 34.9 37.7 38.4 169 + 2.4% 

Sector % Short % Medium % Long % Linker 

2010/11 32.1% 23.0% 24.8% 20.6% 

2011/12 34.3% 20.7% 22.3% 22.7% 

% Difference 2.2% -2.4% -2.5% 2.1% 

Table 5: Distribution Methods in Recent FYs 

Auction Syndication Mini-tender 

FY 09/10 82% 14% 4% 

FY 10/11 80% 17% 3% 

FY 12/13 78% 19% 3% 

Chart 2: Past & Future Gilt Issuance by Quarter 

70,000 

60,000 

50,000 

40,000 

30,000 

20,000 

10,000 

0 

Q1 05 Q3 05 Q1 06 Q3 06 Q1 07 Q3 07 Q1 08 Q3 08 Q1 09 Q3 09 Q1 10 Q3 10 Q1 10 Q3 11 Q1 12 

Source: BNP Paribas 


Market Mover 

21 


US: A Gradual Move Higher and Steeper 

• So far in 2011, the US rates market has had 

its range defined not by Fed policy or 

economic fundamentals but in response to 

geopolitical events. 

3.80 

3.70 

3.60 

Chart 1: 10y Treasury Yield 

• Treasury rates (Chart 1) have cautiously 

recovered from their recent lows since the 

‘worst-case scenario’ in Japan appears not to 

be developing. 

Yield (%) 

3.50 

3.40 

3.30 

3.20 

Unrest in MENA 

begins to intensify 

Earthquake in 

Japan 

• Rates currently occupy the same tight, 

lower end of the range where they traded for 

most of January, before the unrest in MENA 

sparked inflation fears due to surging oil prices 

(Chart 2). 

• The most rapid retracement has been in 

volatility, which has declined towards the lows 

of the year after the earthquake-induced spike 

(Chart 3). This is a bit surprising given that we 

would expect to see the curve steeper and/or 

rates higher for vol to be this low. 

• STRATEGY: We have a bearish short-term 

outlook on US rates, and expect them to 

retrace towards the middle of the range on the 

basis of strength in equities, falling 

unemployment and risks of higher inflation. 

• Barring another geopolitical crisis (fingers 

crossed), the move higher and steeper is likely 

to be gradual. In such a scenario, volatility – 

particularly gamma – should stay range-bound 

or perhaps decline further. 

3.10 

3.00 

3-Jan 

10-Jan 

17-Jan 


Dubai Crude ($) 

120 

115 

110 

105 

100 

95 

90 

85 

3-Jan 

24-Jan 

31-Jan 

7-Feb 

Chart 2: Dubai Crude (USD /bbl) 

10-Jan 

Unrest in MENA 

begins to intensify 

17-Jan 


24-Jan 

31-Jan 

7-Feb 

14-Feb 

14-Feb 

21-Feb 

21-Feb 

28-Feb 

28-Feb 

Chart 3: 1m x 10y Volatility 

7-Mar 

7-Mar 

14-Mar 

Earthquake in 

Japan 

14-Mar 

21-Mar 

21-Mar 

50 

130 

1mx10y (bp) 

Defining the range, returning to ‘normal’ 

Geopolitical events have been the primary driver of 

the rates market so far this year. 

• The upper end of the range – when 10yT closed 

at 3.74% in early Feb – was touched as unrest in 

MENA sent oil prices and the dollar surging, stoking 

fears of inflation. 

• The lower bound was tested – when 10yT broke 

through 3.20% – in the aftermath of the earthquake 

in Japan as the extent and containment of the 

nuclear disaster began to unfold. 

Normalized Vol (bps) 

120 

110 

100 

90 

80 

3-Jan 

10-Jan 

17-Jan 

24-Jan 


31-Jan 

1mx10y (%) 

7-Feb 

14-Feb 

21-Feb 

28-Feb 

7-Mar 

14-Mar 

21-Mar 

45 

40 

35 

30 

25 

Volatility (%) 

Treasury rates have cautiously recovered from their 

recent flight-to-quality driven lows since the ‘worstcase 

scenario’ in Japan appears not to be 

developing. Yields are now at the lower end of their 

normal range for late 2010-2011 (the QE2 cycle). 

Mary-Beth Fisher 24 March 2011 

Market Mover, Non-Objective Research Section 

22 


“Normal” in this context is the period from about mid- 

December to the end of January, just prior to the 

escalation of instability in the MENA region. During 

that period, 10yT traded in a very tight range of about 

3.35% to 3.50%, and the 2s10s Treasury curve 

hovered between 270bp and 280bp. 

Outlook: gradually higher rates, steeper curve 

From here, we lean a bit bearish on Treasury rates 

and anticipate a steepening curve. Rates should 

slowly head back towards the middle of the range 

over the coming weeks while the front end remains 

anchored as QE2 operations continue. Central-bank 

officials from the EU and the US have commented 

that the events in Japan are unlikely to influence 

monetary policy decisions. That implies that the ECB 

is still on track to hike in the coming weeks, and the 

Federal Reserve appears on target to wind up QE2 

as scheduled in June. 

Despite our bearish outlook, we acknowledge there 

are both technical and fundamental factors holding 

back a quick or more substantial sell-off. These 

include: 

• Everyone and their accountant is short the 

Treasury market here. These are expensive positions 

to hold (e.g. the breakeven is ~1 bp per week in 

10yT) so even a modest rally could flush the shorts 

out of the market. Such a reversal could be 

particularly rapid as we head into quarter-end. 

• The 2011 US budget has still not been 

approved, and the government is functioning under 

yet another Continuing Resolution (its sixth since the 

fiscal year began in October 2010). This CR expires 

8 April and the budget negotiations still seem stuck in 

a quagmire. There continues to be a lot of talk about 

implementing fiscal discipline but little concrete 

action from Congress, as taxpayers seem unwilling 

to accept the necessary sacrifices in government 

entitlement programmes. 

• Meanwhile, the government is a mere USD 

123bn away from the USD 14.3trn debt ceiling, and 

the deficit typically adds ~USD 40bn per week. 

Although April could actually produce a week or two 

of surpluses thanks to tax receipts, buying the 

government some time, the picture gets muddy if we 

get close to April month-end and the ceiling has not 

been raised. We don't expect even a partial 

government shut-down to trigger a steep sell-off in 

Treasuries, but it could stagnate the markets while a 

resolution is hammered out. On balance, like the 

budget morass, increasing indebtedness without 

fiscal restraint could put modest upward pressure on 

rates. 

Trades: sell volatility, biased short 

All of these hurdles contribute to near-term 

uncertainty. This makes us think we should sell 

volatility, since we don’t see enough momentum for a 

sharp sell-off in rates in the near term. 

In such an environment, we recommend buying 

mortgages and callable bonds or selling gamma 

outright (prefer 1m options). Callables and 

mortgages can withstand a fairly large sell-off (up to 

100bp depending on the structure) and still 

outperform their duration-matched peers over a 6m 

horizon, so a 20-50bp sell-off isn't a worry. 

The 2s10s Treasury curve has historically hit its 

steepest point just as the Fed finishes an easing 

cycle. If that occurs, we would expect the curve to resteepen 

as the Fed exits its QE2 cycle in late spring / 

early summer. Although we like steepeners the cost 

of, e.g. a 2s10s Treasury steepener, is ~1.5bp per 

month. We recommend waiting until after quarter-end 

and a clearer outlook regarding the situation in Japan 

before entering such a trade. 

Mary-Beth Fisher 24 March 2011 


23 


US: Remember Last Year’s End of March? 

• We still remember how 10y swap spreads 

traded negative for the first time, going against 

what any model would indicate. 

• On this occasion we don’t expect sparks to 

fly again, but it’s still worth highlighting the 

typical month-end and quarter-end trends. End- 

March in particular could have a more 

pronounced effect due to the fiscal schedule for 

banks and Japan. 

• STRATEGY: Expect moderately tighter swap 

spreads until quarter-end but look for a reversal 

shortly after that as corporate issuance tends to 

lighten in April. In Treasuries, favour benchmark 

issues given their tendency to outperform vs 

off-runs into month-end due to liquidity 

preference. 

Global risks are driving swap spreads, but 

quarter-end and corp issuance also matter 

10y spreads have traded in a tight range in recent 

weeks, and it’s worth recalling that one year ago we 

saw a similarly tight range in the 10bp area before 

Tsys came under pressure and underperformed 

swaps massively (see Chart 1). 

Dealers look to cut their balance sheets into quarterend 

and the impact is seen in Chart 2, which shows 

that swap spreads tend to tighten consistently and 

materially in the last week of quarter-end. (note that 

there looks to be an outlier in Q1 2010 when 10y 

spreads widened 6bp. This was right after 10y 

spreads narrowed 12bp in two days and turned 

negative.) 

Chart 1: 10y Spreads Marched Off a Cliff in 2010 

50 

40 

30 

20 

10 

0 

-10 

Jan-09 Jul-09 Feb-10 Aug-10 Mar-11 


Chart 2: 10y Spreads during Quarter Ends (bp 

change in last week) 

8 

6 

4 

2 

0 

-2 

-4 

-6 

-8 

-10 

Q1 

08 

Q2 

08 

Q3 

08 


Q4 

08 

Q1 

09 

Q2 

09 

Q3 

09 

Q4 

09 

Q1 

10 

Q2 

10 

Q3 

10 

Q4 

10 

Chart 3: Corp Issuance Tends to Drop Off From 

March to April 

We don’t expect quite as dramatic a tightening since 

some US banks have now adjusted their fiscal 

schedules. Also, there were other factors last year 

that combined to send swap spreads sharply lower. 

In the last week of March 2010 there was a series of 

weak coupon auctions that left dealers having to take 

down a larger allocation than usual, forcing them to 

shed Tsys in just a few sessions. 

90 

75 

60 

45 

30 

Average Issuance since 2000 

The impact of corporate supply on swap spreads in a 

very steep curve environment has been easily 

identifiable. Issuers switch from fixed to floating debt 

payments by receiving in swaps which puts 

tightening pressure on spreads. The insatiable 

demand for corporate paper means that supply could 

continue to be healthy going forward, and March is 

one of the busiest issuance months in the year (see 

15 

0 

Jan 

Feb 

Mar 


Apr 

May 

June 

July 

Aug 

Sep 

Oct 

Nov 

Dec 

Suvrat Prakash 24 March 2011 


24 


Chart 3). In April we have typically seen a decent 

drop-off by about $15bn and so many players could 

look to set up long positions right after quarter-end. 

We also find a bias for benchmarks to outperform 

into month-end 

When we look at the yield spread between the 3rd 

off-the-run (OTR) and benchmark, then there seems 

to be a downward bias heading into month-end 

(meaning that the benchmark outperforms). This is 

shown in Chart 4 where we take the average 

movement around month-ends from the past 2 years 

(rolls are adjusted for). 

It could be that the overall yield curve is simply 

driving this bias. In the 30y sector we do find a 46% 

correlation between the 3rd OTR vs benchmark 

spread and 10s30s. This could be driven by monthend 

duration extension flows that flatten the overall 

curve, although this doesn’t change the fact that the 

tendency has been for benchmarks to outperform 

into month-end (in other analyses we have found that 

the market tends to rally in the last few days of the 

month, also supporting the idea that month-end 

buying flows add a bias to the market). 

To limit the curve effect, we now look at ASW 

differentials between 3rd OTRs and benchmarks, 

instead of looking at yield spreads. A very similar 

trend can be seen in Chart 5 (note that ASWs are 

quoted as the Tsy yield minus swap yield, so if 

benchmarks outperform then this would show up as 

a flattening in Chart 5). 

Chart 4: Yield Spreads – Average Movement 

Through Month-Ends in Past Two Years 

0.80 

0.60 

0.40 

0.20 

0.00 

-0.20 

-0.40 


10y Benchmark vs 3rd OTR, Yield Spread 

30y Benchmark vs 3rd OTR, Yield Spread 

T-6 T-4 T-2 T T+1 T+2 T+3 

Chart 5: ASW Spreads – Average Movement 

Through Month-ends in Past Two Years 

0.80 

0.60 

0.40 

0.20 

0.00 

-0.20 

-0.40 

10y Benchmark vs 3rd OTR, ASW Curve 

30y Benchmark vs 3rd OTR, ASW Curve 

T-6 T-4 T-2 T T+1 T+2 T+3 


Suvrat Prakash 24 March 2011 


25 


US: Setup for Auctions with Spread Curve Flatteners 

• In general, 2y Tsy tends to cheapen relative 

to the long end going into the auction and 

reverses direction post auction on an average. 

(2s10s, 2s30s flatteners followed by steepeners) 

• 5y and 7y notes have a tendency to move 

almost in line with the long end going into the 

auctions and to richen relative to the long end 

after auctions. (5s10s, 5s30s steepeners) 

• There is a clear trend of belly spread 

widening relative to the front end and long end 

spreads throughout the auction. 

• STRATEGY: Consider paying 5y spreads vs 

10y spreads. Also consider paying 5y spreads 

vs 2y and 10y spreads for a higher average 

move which comes with higher volatility. 

With 2y, 5y and 7y auctions taking place next week, 

we highlight auction based systematic trades which 

we have been recommending in the past issues of 

our weekly publication. 

While doing this analysis, we look at auctions since 

Jan 2010 (total of 12 auctions) and keep the issues 

fixed through each auction (i.e. always use the 

current issue pre auction which becomes old 

post auction) so that there is no spurious roll 

effect. 

Outright Treasury curve behaviour around 

auctions 

Chart 1 shows that while the front end cheapens 

relative to the long end going into the auctions, the 

belly moves more or less along with the long end. 

Post auctions, while both the front end and belly 

richen relative to the long end, a more pronounced 

steepening effect is seen in 5s10s and 5s30s Tsy 

curve. 

Table 1 (at the end of this article) helps us put some 

numbers in perspective for the above mentioned 

curve trades. 5s10s Tsy curve steepener has turned 

in a profit 10 times in the past 12 auctions. The 

average movement in favour of this strategy has 

been about 5.2bp with a volatility of 3.8bp. 

Disclosure: Given our existing structural Tsy 5s10s 

flattening view initiated at 138.5, now at 139.5, we 

will choose not to put on a tactical steepener but may 

use any potential steepening as an opportunity to 

increase our flattening position. 

Chart 1: Treasury Yield Trends Around 2y, 5y 

and 7y Auction days 

8 

6 

4 

2 

- 

(2) 

2s10s 2s30s 5s10s 

5s30s 7s10s 7s30s 

T-5 T-3 T-1 T T+1 T+3 T+5 


Chart 2: Spread-of-Spreads Trends Around 2y, 

5y and 7y Auction Days 

3 

2 

1 

- 

(1) 

(2) 

(3) 

2s10s 2s30s 5s10s 

5s30s 7s10s 7s30s 

T-5 T-3 T-1 T T+1 T+3 T+5 


Chart 3: Comparison of 5s10s Spread Flattener 

with 2s5s10s Spread Fly 

14 

12 

10 

8 

6 

4 

2 

0 

Jan-09 


5s10s 2s5s10s Sharpe Ratio 

5s10s : 1.57 

2s5s10s : 1.36 

Combined : 1.85 

Feb-09 

Mar-09 

Apr-09 

May-09 

Jun-09 

Jul-09 

Aug-09 

Sep-09 

Oct-09 

Nov-09 

Dec-09 

Jan-10 

Feb-10 

Rohit Garg 24 March 2011 


26 


Trades with higher hit ratio and Sharpe ratio in 

swap spreads 

The swap spread curve witnesses a consistent 

flattening trend around these month end auction 

cycles. Chart 2 shows a clear trend of spread curve 

flattening going into the auction across all maturities. 

This spread flattening trend becomes more 

pronounced post auction, especially in 5s10s. 

Based on the rankings (in Table 1, which takes into 

account average move, volatility and hit ratio), 5s10s 

spread curve flattener post 5y auction emerges as a 

clear winner. However, another strategy with a higher 

average movement at the expense of higher volatility 

is the 2-5-10 spread fly (go long 5y spreads vs 2y 

and 10y spreads) which has also worked 12 times in 

last 12 auctions (see Chart 3). 

One other important take away from this chart is that 

on occasions when the spread curve flattener hasn’t 

worked well, the spread fly has worked very well and 

vice versa. Hence, it might be beneficial to take 

positions in both these trades simultaneously to 

increase the chances of net profit margin in terms of 

risk taken. Note that while the Sharpe ratio of 5s10s 

spread flattener is 1.57 and for 2s5s10s spread fly is 

1.36, it is higher when we diversify our risk in both 

these positions. 

Table 1: Auction Trades with Hit Ratios Adjusted for Vol and Hit Ratio (T – respective auction day) 

Average 

Move (in bp) 

Overall 

Rating 

Entry Exit Hit Ratio 

Vol (in bp) 

When did it not work 

2y Auction 

2s3s Tsy Flattener T+1 T+5 9/12 2.34 3.1 0.45 March/May/Nov 

2s5s Tsy Flattener T-1 T+5 8/12 4.07 7.19 0.33 March/May/Dec/Jan (2011) 

2s10s Tsy Flattener T-5 T 10/12 5.74 9.21 0.47 July/Oct 

2s30s Tsy Flattener T-5 T 9/12 7.05 9.31 0.53 July/Oct/Feb (2011) 

2s5s10s Tsy Fly trading lower T+1 T+5 11/12 6.49 7.3 0.75 Nov 

2s5s30s Tsy Fly trading lower T+1 T+5 10/12 6.39 10.74 0.46 Nov/Feb (2011) 

2s10s Spd Flattener T-3 T+5 9/12 3.26 5.62 0.33 Sept/Oct/Jan(2011) 

2s30s Spd Flattener T-3 T+5 10/12 3.36 7.59 0.29 Oct/Dec 

2s5s10s Spd Fly trading higher T+1 T+5 12/12 4.08 2.82 1.18 

2s5s30s Spd fly trading higher T+1 T+5 10/12 3.70 3.45 0.71 Nov/Dec 

5y Auction 

5s10s Tsy Steepener T T+5 10/12 4.24 3.99 0.78 June/Nov 

5s30s Tsy Steepener T T+5 10/12 5.34 8.76 0.46 Nov/Jan(2011) 

3s5s7s Tsy Fly trading lower T-3 T+5 8/12 2.55 3.5 0.39 March/May/Nov/Feb (2011) 

3s5s10s Tsy Fly trading lower T-3 T+5 11/12 5.45 5.8 0.78 Nov 

3s5s30s Tsy Fly trading lower T-3 T+5 11/12 7.56 9.91 0.65 Nov 

5s10s Spd Flattener T T+5 12/12 2.69 1.91 1.01 

5s30s Spd Flattener T T+5 10/12 2.53 2.8 0.53 Dec/Jan(2011) 

3s5s7s Spd Fly trading higher T-3 T+5 10/12 1.88 1.89 0.50 March/Feb (2011) 

3s5s10s Spd Fly trading higher T-3 T+5 11/12 4.39 2.63 1.27 Nov 

3s5s30s Spd Fly trading higher T-3 T+5 10/12 4.89 4.72 0.73 Nov/Dec 

5s10s30s Spd Fly trading lower T T+5 11/12 2.34 2.44 0.60 Sept 

7y Auction 

7s10s Tsy Steepener T-3 T+5 9/12 1.81 3.44 0.29 June/Nov/Feb (2011) 

7s10s Spd Flattener T-5 T+3 11/12 2.00 1.71 0.67 Nov 

7s30s Spd Flattener T-5 T+3 9/12 2.12 4.77 0.22 Oct/Nov/Dec 

3s7s10s Spd fly trading higher T-3 T 8/12 1.04 3.81 0.09 March/June/Nov 

3s7s30s Spd fly trading higher T-3 T 8/12 1.60 4.19 0.18 March/June/Nov 


Rohit Garg 24 March 2011 


27 


MBS: Staging a Comeback! 

• Treasury purchases were part of the GSE 

conservatorship and could carry a taint of 

bailout, especially if there are losses under Fed 

hikes. Fed tightening anticipated by the market 

for Q1 2012 could cause losses and the 1-year 

period of Treasury sales appears consistent 

with these expectations. To that extent, higher 

negative convexity coupons 4.5s and 5s may be 

sold first, followed by others. 

• We think that Treasury sales are part of 

continued efforts to wind down emergency 

programmes and not a precursor to Fed MBS 

sales. 

• Housing may be negatively impacted by 

Fed hikes as post reset ARM borrowers see 

payment increases and banks see delinquent 

loan carrying costs step up. Note how 2007 

reflected the euphoria around economic data 

right before mortgage delinquencies took 

precedence. 

• We remain positive on mortgages. On the 

stack, we favour 4s and 6s vs 4.5s and 5s, while 

remaining neutral on 5.5s. Pre-HARP fast pools 

from the Treasury could hurt 4.5s and 5s. In 6s, 

2008s don’t really stand out. The float in 5.5s 

isn’t as sizeable as in 4.5s and 5s but probably 

not as welcomed as in 6s. 

• Treasury’s largest purchases were in 

December 2008 when payups had suffered 

immensely into year-end. We’re positive on 

specified 4.5s, loan balance 5s and seasoned 

6s, but think that seasoned 5s and 5.5s could 

come under pressure, particularly if the 

Treasury holds such paper. 

• Investors should look out for 23-26 WALA 

FNs, most of which are newly HARP eligible and 

were also likely purchased by the Treasury. 

• GNMA 60-day delinquencies declined in 

February and the overall GNM delinquency 

profile continues to show improvement. 

The Treasury announcement to sell its mortgage 

portfolio came on the heels of the earthquake in 

Japan. With concerns around Japan being a net 

seller of MBS due to repatriation and the MBS 

widening that resulted, from a taxpayer perspective, 

it would be prudent for the Treasury to sell its MBS. 

Moreover, the economic data prior to current events 

in Japan or the Middle East had recently renewed 

concerns around Fed hikes, causing selling in 

Chart 1: Treasury’s MBS Purchases by Month – 

Dec 08 Largest Month as Payups Collapsed 

$ bn 

30 

25 

20 

15 

10 

5 

0 

Sep-08 

Oct-08 

Nov-08 

Source: US Treasury 

Dec-08 

Jan-09 

Feb-09 

Mar-09 

Apr-09 

May-09 

Jun-09 

Jul-09 

Aug-09 

Sep-09 

Oct-09 

Nov-09 

Dec-09 

Chart 2: Treasury’s MBS Holdings 

FN 30Y 

Coupon Total Bal Fed Treasury CMOs Net Tsy/Net 

3.5 29.0 0.2 0.0 28.8 0% 

4 256.8 90.1 1.4 3.0 162.3 1% 

4.5 411.6 232.1 17.2 21.1 141.3 12% 

5 352.5 91.4 22.4 55.7 183.0 12% 

5.5 356.8 71.4 19.1 71.1 195.3 10% 

6 229.0 10.7 8.7 57.9 151.7 6% 

6.5 73.6 0.9 0.0 21.9 50.7 0% 

7 21.8 6.6 15.2 0% 

FG 30Y 


3.5 8.4 8.4 0% 

4 150.9 47.3 6.5 28.3 68.8 9% 

4.5 309.2 171.0 28.0 27.1 83.2 34% 

5 266.8 91.3 21.1 71.7 82.6 26% 

5.5 223.6 10.5 9.0 98.0 106.0 9% 

6 141.8 0.4 2.2 61.4 77.8 3% 

6.5 44.2 0.5 23.6 20.1 0% 

7 9.0 4.9 4.2 0% 

FN + FG 30Y 


3.5 37.4 0.2 - 0.0 37.1 0% 

4 407.7 137.5 7.9 31.3 231.1 3% 

4.5 720.9 403.1 45.1 48.1 224.6 20% 

5 619.3 182.7 43.6 127.4 265.6 16% 

5.5 580.4 81.8 28.1 169.1 301.4 9% 

6 370.8 11.1 10.9 119.3 229.5 5% 

6.5 117.8 1.4 0.0 45.6 70.8 0% 

7 30.8 - - 11.5 19.4 0% 

Source: US Treasury 

Anish Lohokare/Timi Ajibola 24 March 2011 


28 


inverse IOs and investors seeking higher caps for 

example. 

With short duration funding, the key risk for the 

Treasury would be a Fed tightening and a related 

sell-off, which could erase the returns on its MBS 

portfolio. Durations would extend as funding costs 

increase, and prices decline. The market appears to 

be looking at Fed tightening starting Q1-2012. The 1- 

year timeline of Treasury’s MBS sales would be 

consistent with that period. While Fed purchases of 

MBS could face a similar situation, they were 

purchased as part of monetary policy and paid for by 

excess reserves and wouldn’t have the same funding 

concern. Being part of GSE consevatorship, 

Treasury purchases could carry the taint of a bailout, 

unlike Fed purchases. As the Treasury indicated, the 

sales were part of continued efforts to wind down 

emergency programmes. As an extension of this 

logic, coupons with high negative convexity – 4.5s 

and 5s may be sold before others to minimize the 

risk as we get closer to hikes. 

As pointed out by our rates strategists, there was a 

mere USD 123bn clearance left on the debt limit as 

of last Friday, and every bit helps, including the 

approximate USD 14bn in monthly MBS sales and 

prepayments. Furthermore, once the Treasury gives 

back a decent chunk of its MBS holdings to the 

market, the TMPG (Treasury Markets Practice 

Group) may be better placed to impose a fail penalty. 

The concern in the minds of investors in general and 

mortgage investors in particular are the implications 

of Treasury sales on the future of the Fed portfolio. 

We do not think that Treasury MBS sales are a 

precursor to Fed sales. Note that the Fed is still 

completing its QE2 programme, and the effects of 

events in Japan and the Middle East are still not 

completely clear, so to view these sales as a 

monetary policy tool would be premature. These 

purchases do provide the Fed a roadmap in case it 

wants to sell its MBS portfolio, but to infer that these 

purchases are in fact a part of that plan is not 

justified in our opinion. Also given the Treasury’s 

stance on GSE reform on getting private investors 

more involved in the housing market, selling their 

MBS holdings seems like a logical expression of this 

view. 

In fact, as mortgage investors (particularly) can attest 

to, positive economic data caused the 10Y to sell off 

beyond the 5.25% level towards the middle of 2007, 

before being cut to size by mortgage delinquencies. 

It was perceived then that the positive economic 

data, particularly low unemployment, would 

overcome the delinquency picture. But borrowers 

were not able to digest higher mortgage rates then. 

Given that the employment scenario is much worse 

35,000 

30,000 

25,000 

20,000 

15,000 

10,000 

5,000 

Chart 3: Fed Paydowns Have Come Off 

0 

Dec-09 

Jan-10 

Total Total Paydowns Paydowns ($mm) ($mm) 

Source: Federal Reserve, BNP Paribas 

$ bn 

Feb-10 

Mar-10 

Apr-10 

May-10 

Jun-10 

Jul-10 

Aug-10 

Sep-10 

Oct-10 

Nov-10 

Dec-10 

Jan-11 

Feb-11 

Chart 4: Gross MBS Supply Has Declined 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Apr- 

10 

May- 

10 

Source: Bloomberg 

Jun- 

10 

Jul- 

10 

Aug- 

10 

FG 

Sep- 

10 

now, the ability of borrowers, particularly post reset 

ARM borrowers who have seen considerable 

payment relief, to withstand rate hikes, is 

questionable. Latest housing data has been less than 

stellar. Also, minimal funding costs have helped 

banks navigate the unwieldy foreclosure process of 

delinquent loans. If these costs step up, shadow 

inventory could come to market at an accelerated 

pace as carrying costs on delinquent loans go up. 

FN 

Oct- 

10 

Nov- 

10 

Dec- 

10 

Jan- 

11 

Feb- 

11 

Mar- 

11 

Chart 5: Prime Non Agency Delinquencies by 

Stage – 90D and Foreclosure have Ballooned 

25 

20 

15 

10 

5 

30D 

90D 

REO 

60D 

Forecl 

BK 

Prime Delinquencies 

0 

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 




29 


The risk to housing under a premature hike could 

thus be substantial. 

Shortly after the Treasury announcement on MBS 

sales, we discussed that we like purchasing MBS on 

weakness. While that recommendation went through 

rough weather initially, Wednesday saw higher 

coupons making a comeback. We continue to 

maintain our positive outlook on mortgages. Fed 

paydowns have come off from USD 32bn to about 

USD 12bn over the past four months. Gross supply 

has declined drastically (FN Feb USD 52.1bn vs Mar 

MTD USD 37.1bn) as mortgage rates are relatively 

high. Credit fee increases should choke supply 

further. Net supply, with a 1 month lag, to account for 

the lag between prepays and issuance (which 

typically occurs in the following month), was USD 

5bn last month, and should decline further. 

CMO issuance is robust, and to the extent that Tsy 

holds good quality spec pools, they should be 

absorbed readily by CMOs. FRE is already below its 

2011 end portfolio size limit of USD 729bn (at USD 

695bn) though FNM is above that limit (at USD 

777bn). Overall, we think that the extra (up to) USD 

10bn MBS selling by the Treasury is absorbable by 

other investors, including banks, money managers 

and REITs. Treasury selling may also somewhat 

alleviate the fail situation in higher coupons. 

The portfolio size history of the Treasury indicates 

that purchases occurred mainly from Oct 08 to Mar- 

09. Dec 08 was the largest purchase month, and 

would’ve allowed purchases of specified pools (at 

that time) for historically low payups. Other bonds 

though would be late 2008 - early 09 pre-HARP fast 

paying bonds. While we remain positive on the 

mortgage basis overall, Treasury sales could skew 

coupon valuation. In terms of the coupon stack, we 

dropped 5.5s from our previous barbell 

recommendation of 4s, 5.5s and 6s vs 4.5s and 5s, 

due to sizeable Treasury holdings in that coupon. 

This recommendation was based on picking up 

positive convexity given that we were (and still are) at 

the cusp where prepays could ramp up in a rally. But 

given that 5.5% holdings aren’t as high relative to 

float as in 4.5s and 5s we are neutral on that coupon 

and favour 4s and 6s vs 4.5s and 5s. Clearly, given 

relative sizes, GD/FN 4.5s and 5s should be 

negatively impacted, and GN/FN 4.5s and 5s may 

relatively appreciate on the relative 

underperformance of those conventional coupons. 

Our thoughts by coupon: 

1) 4.5s: This coupon remains the key production 

coupon and between GDs and FNs, Treasury 

holdings of USD 45bn add 20% of the current float 

ex-CMOs, Fed and Tsy back to the market. As 

discussed above, the pre HARP pools are likely to 

impact the TBA market negatively, and also affect 

rolls. However, given the reasonable proximity of the 

coupon to par, in a sell-off, 2008 pools may hold 

value due to extension protection. Seasoned 4.5s, 

created during the 2003 refi wave are very well 

protected, relatively unique, and should be well 

supported. Loan balance should be supported as 

well, as we are at the point at which refi’s could ramp 

up in a further rally. 

2) 5s: USD 43bn Treasury holdings add 20% of the 

current float ex-CMOs, Fed and Tsy back to the 

market. As with 4.5s, fast paying bonds should 

negatively impact TBA and rolls at current rate levels. 

At these premium prices loan balance paper remains 

attractive. However, seasoned 5s had proven equally 

callable in the recent rally to historic rate lows and 

with demand not as strong, could come under 

pressure. 

3) 5.5s: USD 28bn add 9% of the current float ex- 

CMOs, Fed and Tsy back to the market. This is 

muted relative to 4.5s and 5s, but once again, the 

prospect of pre-HARP paper could hurt rolls and 

TBA. Seasoned 5.5% payups which have already 

suffered could be negatively impacted if there’s 

supply in that sector. While seasoned 5.5s hadn’t 

converged to recent vintages like in 5s, they still sped 

up a decent bit. 

4) 6s: We think that the USD 10.9bn addition would 

add liquidity to this coupon and demand should be 

forthcoming. Note that 2008 6s do not stand out in 

terms of prepays to the extent they do in lower 

coupons and thus the effect on rolls and TBA should 

be contained. At these USD prices, seasoned pools 

in 6s should be supported as well, particularly as 

they didn’t speed up as seen in 5s and to a decent 

extent in 5.5s. 

Watch out for 23-26 WALA FNs 

In a recent note regarding the HARP extension, we 

noted that the eligibility date change for HARP 

should be negative for 23-26 WALA FNs most of 

whom would be newly eligible under that change (if 

they weren’t already). The Treasury may hold some 

of these bonds given its purchases during that time 

and the prepay history of these bonds may 

underestimate their future convexity. 

Key elements of Treasury MBS sales 

Treasury will monitor supply and demand dynamics 

in the market and determine the optimal timing for 

the sale of securities. Decisions to sell bonds will be 

based on both quantitative and qualitative market 

metrics. State Street Global Advisors (SSgA) is the 

manager for Treasury’s portfolio and will assist in this 

analysis. Unlike the Fed, the Treasury is not 

disclosing CUSIPS. According to the Treasury, its 



30 


portfolio consists primarily of 30Y conventionals. 

There is also a smaller amount of 15Y conventionals 

and one 10/20 MBS guaranteed by FNM. The 

Treasury will not be engaging in coupon swaps and 

dollar rolls. All transactions will be outright sales. 

Bonds will be sold as initially purchased and won’t be 

structured into CMOs. While dealers are encouraged 

to show interest in specific trades or securities, but 

trades will be executed competitively. Many 

securities carry a payup and will be traded as 

specified pools. 

Treasury Portfolio Link 

0http://www.treasury.gov/resource-center/data-chartcenter/Documents/February%202011%20Portfolio% 

20by%20month.pdf 

FAQ Link 

1Hhttp://www.treasury.gov/press-center/pressreleases/Documents/03.21%20Portfolio%20Dispositi 

on%20FAQs%20FINAL.pdf 

Announcement Link 

2Hhttp://www.treasury.gov/press-center/pressreleases/Pages/tg1111.aspx 

GNM Delinquencies 

The GNMA Delinquency report for February showed 

a decline in 60-day delinquencies across all products 

from 1.57% to 1.41%. By Issuer, we saw similar 

results. For instance, BofA 60 day delinquencies 

declined from 1.61% to 1.41%, Chase declined from 

1.98% to 1.8%, Citi declined from 1.92% to 1.69%, 

GMAC declined from 1.75% to 1.62%, Wells declined 

from 1.15% to 1.05% and TBW declined from 5.06% 

to 4.73%. In addition, 30-day delinquencies also 

declined from 4.02% to 3.78%. In general, the 

substantial declines in delinquencies in February are 

in line with seasonals, as delinquencies tend to reach 

their trough around tax rebate period. 

Chart 6: GNM (Fixed and ARMs) 30, 60 and 90+ 

Day Delinquencies 

30 Day 60 Day 90+ Day 

Feb-11 3.78 1.41 1.17 

Jan-11 4.02 1.57 1.26 

Dec-10 4.02 1.59 1.20 

Nov-10 4.15 1.61 1.40 

Oct-10 4.13 1.58 1.36 

Sep-10 4.05 1.54 1.25 

Aug-10 4.11 1.58 1.18 

Jul-10 3.94 1.49 1.27 

Jun-10 4.05 1.49 1.64 

May-10 3.95 1.44 1.65 

Apr-10 3.48 1.32 1.84 

Mar-10 3.59 1.44 1.88 

Feb-10 4.10 1.62 2.08 

Jan-10 4.61 1.93 2.42 

Dec-09 4.52 1.95 2.36 

Nov-09 4.82 2.00 3.40 

Oct-09 4.60 1.98 3.60 

Sep-09 5.07 2.11 3.67 

Aug-09 5.48 2.03 3.88 

Jul-09 4.27 1.87 3.88 

Jun-09 4.68 1.89 3.79 

May-09 4.46 1.80 3.71 

Apr-09 4.16 1.71 3.64 

Mar-09 4.10 1.66 3.52 

Feb-09 4.43 1.78 3.56 

Jan-09 5.02 2.07 3.51 


Overall GNMA 90+ day delinquencies declined from 

1.26% to 1.17%, while CBRs increased from 4.96 to 

5.57. The increase in CBRs was primarily led by 

BofA. BofA CBRs increased from 2.81 to 7.08, while 

its 90+ day delinquency declined from 0.93 to 0.69. 

TBW CBRs also declined from 12.71 to 12.18 but 

remain elevated. TBW buyouts continue to remain 

high possibly to keep 90+ day delinquency below 

5%. In fact, if TBW CBRs were zero then its 90+ day 

delinquency would have been around 5.2%. GMAC 

90+ day delinquency marginally declined from 6.30 to 

6.28 and CBRs declined from 6.43 to 4.92. 



31 


EUR: Risk of Pressure on Term Liquidity 

• Despite lower demand at this week’s MRO, 

excess liquidity is set to increase in coming 

days. 

Chart 1: Term Liquidity Gradually Decreasing 

• However, risks on term liquidity may 

increase after next week’s LTRO. OIS/BOR 

spreads have potential to widen. 

• STRATEGY: Play OIS/BOR spread widening 

and front-end steepeners. 

Lower demand but liquidity ample after the MRO 

The ECB allotted EUR 89.4bn at its weekly MRO. 

EUR 100.5bn were maturing. After this operation, 

liquidity provided by open market operations 

(excluding CBP & SMP effects) dropped from EUR 

443.4 to EUR 432.3bn. However, excess liquidity 

remains elevated at well above EUR 50bn. Liquidity 

needs can be estimated around EUR 370-385bn on 

average for the rest of the period. Indeed, the 

average reserve requirement for the rest of the 

period is at EUR 193.9bn and autonomous factors 

are in the EUR175-190bn area. Thus, the level of 

excess liquidity is enough to allow banks to continue 

to frontload reserve requirements in coming days, 

before reducing gradually their holdings during the 

second half of the period. The level of liquidity is 

consistent with a gradual decrease of the eonia 

towards 0.65% in coming days and is set to decrease 

further during the second half of the reserve 

maintenance period. 

Term liquidity more exposed to pressures 

While short dated liquidity remains ample, term 

liquidity (3mth and beyond) is more exposed to 

pressures. The LTRO expiring next week is very 

large (EUR 149.5bn). Demand at the last two 3mth 

LTRO was in line with the amount expiring 

(February) or well above (January). However, the 

strong demand in February may be explained by 

tensions on eonias during the reserve maintenance 

period in January, as well as by the risk of a return to 

variable rate tenders. This is not the case this time as 

the ECB will keep fixed rate full allotment tenders at 

least until June. In addition, while the cost of one 

3mth ECB liquidity (exposed to rate hikes) is similar 

to the cost of three STROs, there is uncertainty on 

the rate at the 3mth tender. This could weigh on 

demand given the prospect on ECB rates. Demand 

may therefore be around the amount expiring. On the 

other hand, the 3mth LTRO expiring seems to be 

largely held in countries where banks are highly 


Chart 2: Lower Eonia in Coming Days 


dependent on ECB liquidity. It makes sense therefore 

to rule out a significant fall in demand. 

If liquidity provided at the LTRO next week is in line 

with the amount expiring, very short-dated eonia will 

have potential to ease. But when it comes to 3mth 

rates, especially euribors, pressures could mount. 

Indeed, market term liquidity supply may drop in 

coming weeks, as the prospect of ECB rate hikes is 

likely to lead money market funds to reduce the 

maturity of their portfolios, in order to benefit from 

rate hikes. The reduction of 3mth liquidity supply by 

investors may push 3mth rates higher faster than 

rates at the very front end with the pressure being 

greater on euribors than on eonias. 

Strategy: Pay OIS/BOR (June contract) at 26bp. Pay 

ERM1-ERU1 at 27. 

Patrick Jacq 24 March 2011 


32 


EUR: Dislocation? Not Really 

• Last week’s short-lived but intense risk-off 

period has had a surprisingly modest impact on 

EUR relative value space. 

• STRATEGY: Long Schatz ASW spread, pay 

EUR 10Y10Y/20Y10Y (structural). 

Contrary to other episodes of tail risk or rather risk of 

tail risk, the Japan event has had no significant 

impact on the space of EUR relative value strategies. 

In Table 1, we track the performance of standard 

positions during the period from Thursday 10 March 

to Wednesday 16 March (COB), i.e. five days after 

the Japan earthquake. The bulk of the move was 

recorded in delta space, where the EUR 1Y1Y rate 

dropped about 30bp – going from 13bp above the 

21-day average (bearish trend) to 18bp below 

average. This performance reflects the intensified 

discussion about the likelihood of the ECB skipping 

the well-trailed April rate hike. The discussion has not 

changed much in terms of ECB anticipation, as we 

still have a full 25bp rate hike in April, while Dec ECB 

(1.65%) seems to have stabilised 10bp below the 

pre-Japan high. 

The performance of typical risk-off trades has been 

quite modest – if not disappointing. Based on 

previous episodes, we would have expected Schatz 

spreads to widen substantially on the back of the 

10pp increase in implied equity volatility. In reality, 

Schatz spreads moved only marginally (Chart 1). 

Most likely, market positioning has prevented a much 

stronger reaction to the jump in volatility. 

Also, the performance of core/non-core spreads in 

EUR sovereign space has been somewhat 

surprising. Looking at BTP/Bund spreads (Chart 2), 

we note a 12.5bp outperformance of Italy during the 

risk-off period following the earthquake. This is 

clearly counter-trend, as spreads widened by about 

25bp in the month prior to Japan’s shock. Moreover, 

it is probably the only risk-off compression in 

BTP/Bund since the fiscal crisis started. Admittedly, 

Italian credit is less exposed to factors that affect 

problematic issuers within the eurozone. Not least, 

the very strong domestic investor base could be a 

valid reason behind the risk-off compression. 

TRADE: We continue to like Schatz spreads as a 

cheap option against liquidity and credit risk as well 

as a period of protracted risk-off mode. The position’s 

behaviour in the aftermath of the Japanese 

Instrument 

Table 1: Dislocation Analysis 

10-Mar-11 

Deviation from 

21D MAV 

16-Mar-11 

Deviation from 

21D MAV 

Absolute Change 

vs 10-Mar-11 

OIS/Bor 28.3 0.0 28.5 0.1 0.2 

1Y 1s3s 14.5 -0.4 17.8 2.6 3.4 

2Y ccy -30.3 0.6 -31.0 -0.4 -0.8 

1Y1Y 2.72 0.13 2.41 -0.18 -0.31 

3M2Y vol 84.1 -0.2 88.4 3.6 4.3 

5Y5Y vol 84.3 0.0 85.3 0.7 1.0 

2Y ASW -45.0 -0.6 -45.2 -0.8 -0.2 

10Y ASW -15.8 -1.0 -17.4 -2.4 -1.6 

OAT spread 33.0 0.2 31.1 -1.4 -1.9 

BTP spread 167.5 13.1 155.2 -1.4 -12.4 

2/5s 0.70 -0.05 0.73 0.00 0.03 

2/10s 1.24 -0.11 1.32 0.00 0.08 

5/10s 0.54 -0.06 0.58 0.00 0.05 

5/30s 0.76 -0.07 0.84 0.03 0.08 

10/30s 0.22 -0.01 0.25 0.02 0.03 

2/5/10s 0.16 0.01 0.15 0.00 -0.02 

5/10/30s 0.32 -0.05 0.33 -0.02 0.01 

10/20/30s 0.51 -0.02 0.52 0.00 0.01 


30 

28 

25 

23 

20 

18 

Chart 1: Dislocation vs Equity Volatility 

VIX 

Schatz Z spread (RHS) 

15 

-40 

01-Feb-11 11-Feb-11 21-Feb-11 03-Mar-11 13-Mar-11 23-Mar-11 


Chart 2: Non-Core Performance 

170 

165 

160 

BTP/Bund 10Y 

21D average 

155 

150 

145 

140 

135 

130 

125 

120 

1-Feb-11 11-Feb-11 21-Feb-11 3-Mar-11 13-Mar-11 23-Mar-11 


earthquake suggests that investors may have 

lightened up on this strategy. In terms of structural 

dislocation trades, we again highlight long-end 

convexity positions such as EUR 10Y10Y/20Y10Y 

(discussed in previous editions of Market Mover, e.g. 

9 September 2010). 

-47 

-46 

-45 

-44 

-43 

-42 

-41 

Alessandro Tentori 24 March 2011 


33 


EUR: Portugal Coming Closer to the EFSF 

• The final act of the Portuguese minority 

government took place on Wednesday, when all 

the opposition parties voted against the recently 

announced round of fiscal measures. 

• PM Socrates offered his resignation to 

President Silva. He will be attending the critical 

EU summit in a caretaker capacity. 

• Refinancing needs will spike in April and 

June. We believe that year-to-date funding 

should be adequate for April’s needs but not for 

June’s. 

• This increases the likelihood that Portugal 

will soon have to ask for external assistance 

since access to the markets will become even 

more challenging now. 

The end of the minority government 

The final act of the Portuguese minority government 

took place on Wednesday evening when the 

opposition parties voted against the measures 

recently announced by PM Socrates and which were 

welcomed by EU authorities in the 11 March EU 

Council meeting. This did not come as a total shock 

to the market as the main opposition party had 

already warned that it would vote against this new 

round of measures. Indeed, spreads started widening 

at the beginning of the week when the opposition 

party expressed its stance (Chart 1). This is not the 

first time that a parliamentary vote in Portugal has 

turned into a saga. We had a similar story back in 

October 2010, when the 2011 budget was passed 

only because the main opposition party abstained 

from the vote at the last moment after tough 

negotiations with the government. 

After this week’s result, PM Socrates offered his 

resignation to the President Silva. However, he is 

expected to attend the EU summit in a caretaker 

capacity. What becomes more likely after these 

recent developments is that Portugal will have to ask 

for external aid in order to cover its upcoming funding 

needs. To quote the FinMin, rejecting the 

government’s proposed austerity package would 

create “additional difficulties for the country’s 

financing which I doubt we will be able to bear on our 

own”. We agree with him on this one, and Portugal 

seems very likely to follow the examples of Greece 

and Ireland although it is in a very different state from 

these two countries. 

Chart 1: OT/Bund Spreads 

550 

PGB 10/14-OBL 10/14 PGB 6/20 -DBR 7/20 PGB 6/12 -BKO6/12 

500 

450 

400 

350 

300 

250 

Jan-11 Feb-11 Mar-11 


Chart 2: Portugal’s Refinancing Needs in 2011 

8 

Coupon 

Bills 

7 

PGBs 

6 

5 

4 

3 

2 

1 

0 

Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 


Chart 3: Portugal’s Funding in 2011 So Far 

5 

4.52bn 

3.83bn 

4 

3 

2.01bn 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

Jan-11 Feb-11 Mar-11 

Placements (since mid-Dec) Bills Issued 

Bills Maturing 

Bonds Issued 

Cumulative Net Funding 


Ioannis Sokos 24 March 2011 


34 


Refinancing needs spike in April and June 

This becomes clearer when you monitor the 

breakdown of Portugal’s refinancing needs in 2011; 

these are shown in Chart 2. As we’ve written many 

times in the past, April and June are by far the 

heaviest months in terms of refinancing needs with 

EUR 5bn and 7bn respectively. Portugal has used 

private placements, one OT syndication, OT 

reopenings and T-bill auctions in order to fund itself 

so far this year. Taking all this into consideration, we 

estimate that Portugal is in a position to refinance 

April’s redemptions and May’s deficit but not the big 

spike in refinancing needs in June. This means that it 

would have to keep issuing in the primary market in 

the next couple of months, something that has 

become too expensive and unsustainable in the 

medium term. Conditions could deteriorate further 

after the recent political developments, with the risk 

of further downgrades increasing. 

Funding so far this year 

Portugal’s funding year-to-date is shown in Chart 3. 

Cumulative net funding is at EUR 3.8bn but this 

number needs to be adjusted by the cash balance at 

the start of the year and the deficit during Q1. As far 

as the cash balance at the start of the year is 

concerned, this is estimated at EUR 2-4bn according 

to unofficial reports. Even taking the worst case of 

EUR 2bn and adding it to the cumulative net 

issuance year-to-date, we come up with EUR 5.8bn 

from which we need to subtract the Q1 deficit. We 

have data only for the months of January and 

February: there was a budget surplus of 77 million on 

aggregate. So unless the March budget data surprise 

to the downside (not likely as there are no coupon 

payments), Portugal can remain fully funded through 

April. 

Potential EFSF/IMF programme for Portugal 

Discussions on the potential size of an EFSF/IMF 

programme for Portugal have already begun, with the 

market focusing on a figure of EUR 70-80bn. While 

there is no scientific way to estimate this, we provide 

some analysis on some of the constituents of this 

figure that can be monitored. In Chart 4, we present 

the cumulative sum of PGB redemptions and 

projected budget deficit (BNPP estimates) until the 

end of 2013. In this analysis, we exclude T-bills that 

could continue to be rolled over in the market, as 

Greece does at the moment. Thus, excluding T-bills, 

we get a total sum of redemptions and deficit of 

around EUR 53bn up to the end of 2013. This is the 

minimum Portugal would need in order to be fully 

funded until the end of that year. We use the word 

“minimum” because there is some ongoing 

discussion on the inclusion of some state-owned 

companies in the public debt figure, according to the 

Portuguese press. 

60 

50 

40 

30 

20 

10 

Chart 4: Minimum Cumulative Funding Needs 

0 

Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 


Sum of Bond Redemptions & Projected Budget deficit (BNP) 

On top of that, we should add some funds for the 

Portuguese banking system. Certainly, this is going 

to be much lower than the EUR 35bn approved for 

the Irish programme. Our analysts estimate that 

Portuguese banks could need in the region of EUR 

5bn under an EFSF/IMF programme. This adds up to 

a total EFSF/IMF programme size of around EUR 

60bn. 

Another tricky issue with a potential EFSF/IMF 

programme for Portugal is that some of the last 

disbursements of that programme will fall under the 

ESM’s jurisdiction since they take place after July 

2013. This could be solved by agreeing to a much 

more frontloaded and possible smaller package for 

Portugal, given that it is in a better state than Greece 

and Ireland and some of its problems are political in 

nature. 

Nevertheless, this could fire up a more extensive and 

realistic discussion on the issue of seniority of ESM 

loans over existing debt. The last disbursement for 

Greece is scheduled for June 2013 and for Ireland in 

November 2013. However, in both these cases, the 

ESM was discussed on a theoretical basis when 

these programmes were signed and nothing was 

certain with respect to the seniority of these loans 

and the inclusion of CACs. In the case of Portugal 

though, this could become an important turning point 

with respect to the horizon of the programme and the 

schedule of the disbursements. 

As mentioned in the latest Moody’s report following 

the downgrade of Portugal to A3, “The new 

measures in the recent update on the stability and 

growth programme announced by the Portuguese 

government figured prominently in the rating 

conclusion”. This raises the risk of further 

downgrades now that these measures have not been 

passed in the parliamentary vote. 

Ioannis Sokos 24 March 2011 


35 


EMU Debt Monitor: CDS Analysis 

Chart 1: AAA 5y CDS basis*: Austria back at H2 2010 

extremes 

Chart 2: Non-core CDS basis*: OT richened versus CDS 

50 

5Y CDS basis 

40 

5Y CDS basis 

40 

cash cheap vs CDS 

20 

cash cheap vs CDS 

30 

0 

20 

-20 

10 

-40 

0 

-60 

-10 

-80 

-20 

cash expensive vs CDS 

-30 

Sep-10 Oct-10 Oct-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 

FRA FIN AUS NETH 

-100 

cash expensive vs CDS 

-120 

Sep-10 Oct-10 Nov-10 Nov-10 Dec-10 Jan-11 Jan-11 Feb-11 Mar-11 

BEL SPA ITA POR 

The decline has been impressive among the CDS of AAA As observed last week, non-cores have divided into two 

countries such as Austria over the past week – roughly a 10bp groups with lower CDS on Spain, Italy and Belgium and higher 

move, pushing Austria/France 5y CDS differential almost to its CDS for Portugal and Ireland. The richening of BTPs and 

2010 extremes. While Germany and France are still 10bp Bonos versus CDS flagged last week occurred but has been 

above their October lows, Netherlands and Austria are back at fairly limited compared to that for OTs, Irish and GGBs despite 

or below these lows. The main implication of the CDS move the lack of SMP activity (Portugal and Ireland 5y CDS basis 

has been a further cheapening of ATS and to a lesser extent of have moved 30bp and 20bp, respectively). We expect a further 

DSL vs. CDS, with the former back at their cheapest levels vs. richening, especially on OTs, with the risk of a return to 

CDS seen in early Dec (see the high z-score level above 2.50). December extremes on the CDS basis (see Chart 2). 

All Charts Source: BNP Paribas. * CDS basis vs. Germany’s one 

CDS Table & Stats 

5y FIN NETH FRA AUS BEL ITA SPA POR IRE GRE 

CDS 31 39 75 61 141 156 217 527 626 1006 

CDS Weekly change -3 -3 -4 -11 -8 -5 -9 21 29 -6 

cash -30 -31 -19 -13 36 62 101 381 599 780 

Basis 61 70 94 74 105 94 116 146 28 226 

Basis Box vs Gy 29.2 20.1 -3.6 15.9 -14.6 -3.7 -25.3 -55.2 62.8 -135.3 

Average 29.1 13.9 -11.1 1.2 -16.1 -10.5 -23.3 -45.5 -19.7 -79.8 

Max 42.4 21.2 -2.4 15.9 0.5 19.8 2.4 -1.5 83.1 3.9 

Min 18.2 5.0 -24.2 -12.9 -45.4 -61.6 -52.5 -117.7 -93.1 -194.1 

Z score** 0.01 1.41 1.82 2.64 0.16 0.45 -0.16 -0.31 2.06 -1.25 

Current CDS Change to 31/12/2009 Change to 30/6 

2y 5y 10y 2y 5y 10y 2y 5y 10y 

FIN 17 31 42 4 5 9 -3 -3 3 

NETH 21 39 49 0 9 14 -14 -6 0 

FRA 49 75 91 30 46 55 -25 -14 -3 

AUS 29 61 72 -22 -22 -21 -37 -27 -21 

BEL 103 141 145 67 89 79 -25 -5 -4 

ITA 81 156 168 21 58 58 -103 -33 -9 

SPA 152 217 226 83 100 99 -133 -45 -16 

POR 500 527 484 431 429 374 115 210 213 

IRE 676 626 553 544 465 385 381 356 304 

GRE 1038 1006 884 820 722 590 44 114 105 

All Charts Source: BNP Paribas 

** z score measures the deviation from 6-mth rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. A 

number above 1.50 means that the cash is trading historically cheap compared to its average basis level. 

Eric Oynoyan / Ioannis Sokos 24 March 2011 


36 


EMU Debt Monitor: Key RV Charts 

Chart 3: 2015 BTP/Bund: still too high compared to 2013 

Chart 4: Hedged 2013/2016/20 Olo spread 

250 

200 

Nov15 BTP/Bund Jan16 

spread 

40 

30 

20 

US QE/ Equity 

indices bottom 

OLO 16 

cheap 

150 

10 

0 

100 

-10 

-20 

50 

OLO 16 expensive 

-30 

2013 BTP/OBL 

spread 

-40 

0 

Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 

30 55 80 105 130 155 180 205 230 

2013/2016/2020 OLO Fly 

2015 BTPs are still lagging the compression trend seen on 2y 

maturities with the spread roughly 15-18bp too wide relative to 

shorter maturities like Apr 13. Buying BTP Aug 15 vs. Bunds 

provides some opportunities with a medium-target in low 90s. 

Chart 5: BTP/CTZ spds: Feb 12 on highs, Dec 12 on lows 

30 

20 

10 

0 

-10 

-20 

-30 

Sep-11 Feb-12 Apr-12 Aug 12 vs July 12 Dec-12 

Last 

While the belly of the Olo curve has started to normalise, 

retracing half of its cheapness, this week’s launch of the new 

Olo 5y led to a 7-8bp pullback. At current valuations, Olos are 

more mispriced than Bono Apr 16 – which makes little sense. 

Chart 6: OT 2013/16/20 hedged fly: 5y OT not recovering 

90 

70 

50 

30 

10 

-10 

-30 

-50 

-70 

-90 

Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 

Hedged 2013/2016/2020 OT Fly 

Fair value + 3 st deviations 

Fair value - 3 st deviations 

BTP/CTZ spds have diverged recently with Feb 12 on the In contrast to BTPs and Bonos, political uncertainty in Portugal 

highs and Dec 12 reaching our 10-12 target. Switching long has prevented 2016 OTs from recovering on the local curve. 

BTP Feb 12 into CTZ Feb 12 at 9-10bp offers opportunities. Taking into account the current extreme levels on 5y, the most 

For Dec 12, we would wait for 18-19 to again buy CTZ versus likely scenario is a further richening of the cash vs. CDS. 

BTP. 

Chart 7: 2012/13 BTP ASW: still some potential for 2013 Chart 8: Olo/ATS 13/20 box: Olo 2y becoming expensive 

Bono fly 

40 

BTP & Bonos ASW Spreads 

50 

40 

OLO 2013 too cheap 

2013 Olo 

richening 

30 

30 

20 

Historical Average + 2.0 st dev 

20 

10 

0 

10 

-10 

0 

-20 

-30 

OLO 2013 

expensive 

-10 

Oct-10 Dec-10 Feb-11 Apr-11 

BTPS 2 15/12/12/BTPS 2 01/06/13 BTPS 2 15/12/12/BTPS 4.25 1/8/13 

SPGB 3.9 31/10/12/SPGB 2.30 30/04/13 SPGB 3.9 31/10/12/SPGB 2.5 31/10/13 

Since late Feb, 2013 BTP and Bonos richened vs. 2012 in 

ASW terms. However, as Chart 7 shows, BTP June 13 is still 

too cheap – 20bp cheaper than BTP Dec 12, lagging the Bono 

Oct 12/Apr 13 ASW tightening which is around 6bp. 


-40 

Historical Average - 2.0 st dev 

-50 

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 

Olo Sep 13/Oct 13/Sep 20/July 20 

While 10y Olo was trading v. expensive in Jan, the Olo curve 

has more than normalised – pushing Olo 2y to expensive 

levels. Olo 2y also overshot the Belgium CDS move. We do 

not see value in Olo Mar 13/BTAN July 13 at 22bp. 



37 


EMU Debt Monitor: Trade Ideas 

• Sell DSL July 12 into DSL Jan 13. 

Chart 1: 1y/2y/3y Euro fly & ECB repo: Fly 

almost back to cyclical highs 

• Sell Fin Sep 12 into July 13. 

• Sell Bono July 25 into Bono Jan 29. 

• Sell Bono July 32 into Bono July 40. 

• Sell BTP Nov 29 into BTP Aug 39. 

• We like OLO 2017/2020 steepeners vs 

flatteners in BTPs; box is at extreme levels. 

4.5 

4 

3.5 

3 

2.5 

2 

1.5 

20 

10 

0 

-10 

-20 

-30 

1 

-40 

We focus this week both on the short end of the AAA 

curve and on the 30y part of non-core curves in the 

wake of the protracted cheapening of 2013 AAA 

maturities and the dislocation of 30y non-core since 

the 11 March EU council meeting. 

AAA 1y/3y area: 2y DSL and Fin attractive 

The market’s gradual reassessment of future ECB 

monetary policy since early September has led to a 

marked cheapening of the 2y maturity versus 1y and 

3y on the swap curve and to a lower extent among 

the AAA curves. Chart 1 plots the Eur 1y/2y/3y swap 

fly and the ECB repo rate since January 2005. While 

the ECB has not yet started its tightening policy, the 

2y maturity is trading close to its cyclical cheapest 

levels witnessed in late 2005 after a few ECB hikes 

or in mid-2009, when investors were pricing in a V 

shape recovery. On the cash, as Chart 2 illustrates, 

the cheapening of AAA 2y maturities has been 

the most pronounced on Finland and DSLs. In 

terms of pure relative value, it is worth noting the July 

12/Jan 13 DSL/Bund box is back at its highs, i.e. 

DSL Jan 13 too cheap. In order to exploit that 

cheapness, we would recommend holders of DSL 

July 12 to switch into Jan 13, enjoying a 20-20.5bp 

pick-up compared to 5bp in mid-November and 15bp 

on bunds. On Finland, selling Fin Sep 12 into July 

13 – providing a 28bp pick-up – is also attractive. 

30y non-core: more dislocation on BTPs and 

Bonos 

The resumption of intra-EMU spread tightening 

following the EU council focused on shorter 

maturities, which led to a bull steepening of the Bono 

and BTP curves. Such a move led to some 

dislocation at the very long end of the two curves, 

even though 10y/30y Bono/Bund and BTP/Bund 

boxes were already at all-time highs before the EU 

council meeting. Chart 3 and 4 exhibits the hedged 

10y/30y segments versus the money market slope. 

0.5 

Jan-05 Jun-06 Nov-07 Apr-09 Sep-10 

ECB repo 


Eur 1y/2y/3 swap fly (R.H.S) 

Chart 2: AAA 1y/2y/3y flies (BTAN, DSL,Fin) 

10 

5 

0 

-5 

-10 

-15 

2013 area expensive 

1y BTAN, DSL, RFGB ASW Flies 

2013 area cheap 

-20 


BTNS Jan 13/14/15 DSL July 12/13/14 Fly RFGB Sep 12/13/14 Fly 


15 

10 

5 

0 

-5 

-10 

Chart 3: Hedged 2020/40 BTP spread: 30y 

getting close to June 2010 extremes 

-15 

May-10 Aug-10 Nov-10 Feb-11 


10y BTP/Bund spread at 

the widest 

Sep 20/ Sep 40 BTP spread 

-50 



38 


The BTP segment – the steepest among all cash 

curves – is trading two standard deviations above its 

fair value but is not yet back at June 2010 highs. The 

return to such extremely cheap 30y valuation would 

mean another 5bp 10y/30y BTP steepening, i.e. BTP 

Sep 20/Sep 40 spread overshooting to 99/100bp 

level. 

Chart 4: Hedged 2020/40 Bono spread: 30y back 

at May 2010 extremes 

40 

30 

20 

10 

Regarding the Spanish curve, as Chart 4 

underscores, 10y/30y segment valuation versus 

Euribor slope is already back at May 2010 Greek 

crisis levels – even though there are no signs yet of a 

stabilisation. 

In terms of relative value, the curve steepening has 

been quite heterogeneous among OFR 30y bonos. 

As Chart 5 underscores, the bulk of the recent 

steepening has been focused on the 2025-2029 

segment (Bono 2025 has actually richened 15bp 

within the Bono 2019/2025/2040 fly since early 

March). A bit further along the curve, Bono Jan 

29/Bono July 32 spread has also remained 

amazingly stable at its lows. Taking into account this 

decoupling, we would recommend holders of 

Bono July 25 to exploit the recent steepening to 

switch into Bono Jan 29 (yield pick-up at new 

highs at 23bp, targeting 15bp) and holders of 

Bono July 2032 to switch into July 2040 (yield 

pick-up back to 8-8.5bp). 

0 

-10 

-20 

-30 

-40 

-50 

Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 


0.35 

0.25 

0.15 

0.05 

Jul 2019/Jul 40 Bono spread 

Chart 5: 10y/30y Bonos & 20y/30y spreads: 

Bono 2025 and 2032 richer 

0.9 

0.85 

0.8 

0.75 

0.7 

0.65 

0.6 

0.55 

0.5 

0.45 

As far as OFR 30y BTPs are concerned, we 

recommend benefiting from the recent spike in the 

BTP Nov 29/BTP Aug 39 spread to sell the former 

in favour of the latter, enjoying an 18bp pick-up. 

The spread hovered around 11-12bp for most of 

2010. 

OLOs versus BTPs in 2017 vs 2020 sectors 

Belgium launched a new OLO Jun-2017 at quite 

cheap levels in the past week. Indeed, the 

2017/2020 part of the Belgian curve appears to be 

too flat vs the relative curves of Italy and Spain. 

OLOs have richened a lot vs core paper since they 

have tended to benefit from the recent rally in 

peripheral markets. Versus peripherals like BTPs or 

Bonos, OLOs are actually trading in a parallel fashion 

– only with a lower beta. This makes the outright 

OLO/BTPs or OLO/Bonos spread quite directional. 

However, the recent trading pattern does not justify 

the dislocation mentioned above on the 2017/2020 

sectors. Chart 6 shows the box between BTPs 

2017/20s and the relative OLOs. The box is close to 

its historical highs and we expect it to correct from 

these extreme levels. Instead of using the OLO Mar- 

17, one could use the new Jun-17 which is even 

cheaper than the Mar-17, i.e. a 6bp yield pickup. 

-0.05 

0.4 

Jul-10 Aug-10 Oct-10 Nov-10 Jan-11 Feb-11 Mar-11 

SPGB 4.9 30/7/40 YLD-SPGB 6 31/1/29 (ESP) YLD (RHS) SPGB 5.75 30/7/32 YLD-SPGB 6 31/1/29 (ESP) YLD (RHS) 

SPGB 6 31/1/29 (ESP) YLD-SPGB 4.65 30/07/25 YLD SPGB 4.9 30/7/40 YLD-SPGB 4.85 31/10/20 YLD 


Chart 6: BTPs vs OLOs 2017/20: Olo 17 too cheap 

35 

[BTPs Sep-20 vs Feb-17] - [OLO Sep-20 vs Mar-17] 

30 

25 

20 

15 

10 

28bp move on the BOX 

5 

0 

Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 




39 


EMU Debt Monitor: SSA & Covered Bonds 

• The richening of Austrian agencies relative 

to Dutch ones and CADES is still ongoing. We 

question the sustainability of the relative levels 

reached in the 10y area. 

• A theoretical model suggests that OBND 

and CADES are rather rich compared to BNG 

and NEDWBK. 

• STRATEGY: Buy NEDWBK Jan 21 (32bp 

asw). 

In this analysis, we discuss further the richening of 

Austrian agencies, a topic discussed in January. As 

highlighted in Chart 1, OBND (as well as OKB and 

ASFINAG) prolonged further the tightening bias and 

is now as rich as CADES Oct 20 in ASW space. BNG 

Sep 20 has still not recovered from the 3bp widening 

that occurred at the end of 2010, and new NEDWBK 

Jan 21 is still at a 2bp premium to BNG. 

Overall, Dutch agencies remain cheaper than OBND 

and CADES in the 10y area. This sounds bizarre at 

first glance, given the respective macro fundamentals 

of each country. Indeed, as shown in Chart 2, the 

gross government debt-to-GDP ratio, a key variable 

in the long run, is lower in the Netherlands, followed 

by Austria and then France, reflecting the respective 

levels of sovereign CDS. 

However, further criteria should be considered. For 

instance, in the EGB space, OATs trade richer than 

ATs because the liquidity surplus offered by OATs, 

relative to ATs more than offsets the credit premium 

differentiation. 

On the agencies’ side, we need to take into account 

the fundamentals behind each agency in addition to 

pricing levels of underlying govvies, liquidity criteria 

and other factors. Essentially, unlike CADES, BNG 

and NEDWBK, Austrian agencies benefit from an 

explicit, direct, unconditional and irrevocable 

guarantee from the state. The intrinsic value of such 

guarantee could actually richen in a bail-in 

environment. But taking into account the type of 

guarantee and other strong support(s) from the state, 

net supply forecasts for the year, a proxy for liquidity, 

and the underlying sovereign debt asset swap 

spread, we come up with a theoretical model that we 

compare to the actual market pricing (Chart 3). The 

model suggests that OBND and CADES are rather 

rich compared to BNG and NEDWBK. This supports 

our belief that the richening of OBND Oct 20 is 

somewhat overdone and that the persistence of 

CADES Oct 20 is fragile. 

Chart 1: Dutch Agencies Look Cheap vs CADES 

& Austrian Agencies 

45 

40 

35 

30 

25 

20 

15 

10 

ASW 

OBND 3.5 19/10/20 CADES 3.75 25/10/20 

NEDWBK 3.5 14/01/21 NEDWBK 3.875 17/2/20 

BNG 2.625 01/09/20 

Jan 10 Mar 10 May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 

Chart 2: Better Fundamentals in Netherlands 

120 

100 

80 

60 

40 

20 

France 5y Sov CDS Nether 5y Sov CDS 

0 

Austria 5y Sov CDS 

Sep 09 Mar 10 Sep 10 Mar 11 

Gross Gov Debt (% GDP) 

2010 2011 2012 2013 

Nether 64.1 66.2 67 67 

Austria 69.5 70.8 74.2 77.6 

France 84 88 90.5 90.5 

Chart 3: Rich OBND & CADES Oct 20 

40 

30 

20 

10 

0 

Market A SW 

KFW 

NEDWBK 

BNG 

ASFINAG 

Rich OBND (L) 

& CADES (R) 

0 10 20 30 40 


At current levels, we still believe it is worth 

positioning into BNG Sep 20 and especially 

NEDWBK Jan 21, which offer better premium to 

underlying govvies (35bp ASW compared to 18bp in 

the case of CADES and 13bp in the case of OBND!). 

The differential of the premium to govvies is actually 

the highest in that area of the curve. 

FV 

Theoritical ASW 

Camille de Courcel 24 March 2011 


40 


EMU Debt Monitor: Redemptions 

EGB redemptions fall marginally in April to EUR 58bn but remain at relatively high levels. Most importantly, we’ll have EUR 

4.34bn of redemptions in Portugal (almost 45% of its annual redemptions) and EUR 15.5bn (almost 1/3 of annual redemptions) 

in Spain. France and Germany also have significant redemptions. 

EGB Monthly Redemptions 

Bonds Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 

ITA 0.0 18.7 30.5 0.0 14.6 12.2 0.0 20.2 46.0 0.0 15.5 0.0 157.6 

FRA 17.8 0.0 0.0 18.4 0.0 0.0 29.3 0.0 13.8 15.7 0.0 0.0 95.0 

GER 23.3 0.0 15.0 19.0 0.0 15.0 24.0 0.0 16.0 17.0 0.0 18.0 147.3 

SPA 0.0 0.0 0.0 15.5 0.0 0.0 15.5 0.0 0.0 14.1 0.0 0.0 45.1 

GRE 0.0 0.0 8.7 1.0 7.0 0.0 0.0 6.8 0.0 0.0 0.0 5.8 29.4 

BEL 0.0 0.0 11.3 0.0 0.0 3.4 0.0 0.0 12.7 0.0 0.0 0.5 27.9 

NET 13.9 0.0 0.0 0.0 0.0 0.0 14.1 0.0 0.0 0.0 0.0 0.0 27.9 

AUS 8.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 8.4 

POR 0.0 0.0 0.0 4.5 0.0 5.0 0.0 0.0 0.0 0.0 0.0 0.0 9.5 

IRE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.5 0.0 4.5 

FIN 0.0 5.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.7 

Total 63 24 66 58 22 35 83 27 89 47 20 24 558 

EGB Monthly Redemptions 

T-Bill Monthly Redemptions 

T-Bills Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 

ITA 17.4 17.3 17.3 17.3 14.6 15.8 16.3 7.2 7.7 7.2 6.1 4.2 148.0 

FRA 33.3 35.9 38.3 31.9 15.8 16.4 16.3 7.4 5.6 7.1 5.8 5.5 219.3 

GER 11.0 11.0 11.0 11.0 11.0 11.0 9.0 4.0 4.0 5.0 3.0 2.0 93.0 

SPA 8.7 7.9 10.2 7.3 5.8 5.1 6.1 9.7 5.8 8.5 4.0 5.1 84.3 

GRE 4.2 0.4 1.4 3.2 0.4 0.0 2.4 0.0 0.0 0.0 0.0 0.0 12.0 

BEL 5.5 6.2 6.4 6.7 5.7 3.6 3.6 2.1 2.0 2.0 1.8 1.6 47.4 

NET 9.7 8.3 17.4 7.0 4.0 8.0 2.4 0.0 5.0 0.0 0.0 2.3 64.1 

AUS 0.1 2.2 0.9 3.4 0.0 0.0 0.1 0.9 0.1 0.2 0.3 0.0 8.3 

POR 3.4 3.5 3.8 0.0 0.0 0.0 2.3 1.8 1.4 1.4 1.4 0.0 19.0 

IRE 2.1 1.2 1.6 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6.0 

FIN 3.5 2.3 2.6 1.5 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 11.7 

Total 98.9 96.2 110.9 90.5 59.0 59.9 58.6 33.1 31.7 31.3 22.4 20.6 713.1 

T-Bill Monthly Redemptions 

100 

90 

80 

70 

60 

50 

40 

30 

20 

10 

0 

Monthly EGBs Redemptions 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 

120 

100 

80 

60 

40 

20 

0 

Monthly T-Bills Redemptions 

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 

This Month’s EGB Redemptions 

Country Bond Maturity Issued EURs (bn) CRNCY 

FRANCE FRTR 6 1/2 04/25/11 25/04/2011 26/02/1996 18.40 EUR 

GERMANY OBL 3 1/2 04/08/11 08/04/2011 24/03/2006 19.00 EUR 

SPAIN SPGB 4.1 04/30/11 30/04/2011 15/01/2008 15.54 EUR 

GREECE GREECE 0 04/05/11 05/04/2011 05/04/2004 1.00 EUR 

PORTUGAL PGB 3.2 04/15/11 15/04/2011 16/11/2005 4.35 EUR 

Total 58.29 

This Month’s T-Bill Redemptions 

Country T-Bill Maturity CRNCY EURs 

AUSTRIA Many small T-Bills EUR 4.6 

BELGIUM BGTB 0 04/14/11 14/04/2011 EUR 6.7 

FINLAND RFTB 0 04/20/11 20/04/2011 USD 0.6 

FINLAND RFTB 0 04/12/11 12/04/2011 EUR 2.2 

FRANCE BTF 0 04/07/11 07/04/2011 EUR 7.6 

FRANCE BTF 0 04/14/11 14/04/2011 EUR 8.3 

FRANCE BTF 0 04/21/11 21/04/2011 EUR 7.5 

FRANCE BTF 0 04/28/11 28/04/2011 EUR 8.5 

GERMANY BUBILL 0 04/20/1120/04/2011 EUR 6.0 

GERMANY BUBILL 0 04/13/1113/04/2011 EUR 5.0 

GREECE GTB 0 04/26/11 26/04/2011 EUR 0.8 

GREECE GTB 0 04/15/11 15/04/2011 EUR 1.4 

GREECE GTB 0 04/15/11 15/04/2011 EUR 1.0 

IRELAND IRTB 0 04/18/11 18/04/2011 EUR 1.3 

ITALY BOTS 0 04/15/11 15/04/2011 EUR 8.3 

ITALY BOTS 0 04/29/11 29/04/2011 EUR 9.0 

NETHERLANDS DTB 0 04/29/11 29/04/2011 EUR 12.5 

SPAIN SGLT 0 04/21/11 21/04/2011 EUR 7.3 

Total 98.4 

All Charts Sources: BNP Paribas 



41 


EUR Vol: Rate Hike without a Vol Rally? 

• Implied volatility has recently featured 

negative correlation with the level of rates. This 

is unusual given the current phase of the cycle 

but we expect such dynamics to persist for 

some time as a result of the legacy of recent 

exogenous shocks 

• In the meantime, we expect rates at the front 

end to continue to drift higher as the ECB 

begins the tightening cycle in April 

• STRATEGY: Pay the 2y swap and sell 

2.1- 3.0% 3m2y collar. 

The market is pricing in a rate hike to be delivered by 

the ECB at the next meeting in April. We agree with 

the market and maintain our bearish view on the front 

end. In the meantime, the 2y swap rate hovers 

around 2.24% whereas the 3m2y swap rate is 

around 2.47%. As shown by the literature, the 

forward rate is not an unbiased predictor of the future 

spot rate unless, as suggested by E. Fama, it is not 

adjusted by a term premium. This, clearly, is quite 

complex to model. 

To gauge where the 2y swap could be in three 

months’ time, or more precisely, in three months after 

the first rate hike, it is a simpler task to look at the 

previous two hiking cycles. The first began in 

November 1999, when the ECB was still in its infancy 

and started the cycle with a 50bp hike. The second 

was in December 2005, when the ECB raised the 

Refi by 25bp. The Refi was increased by an 

additional 25bp over the period in both instances. In 

the former case, the 2y swap surged by 60bp over 

the following three months whereas in the latter case 

the rate increased by 43bp. Against this backdrop, 

the 23bp increase implied by the 3m2y rate looks 

insufficient. Accordingly, we favour paying the 2y 

swap at current levels (either spot or 3M forward). 

The negative carry on a short 2y payer position is 

25bp/3m whereas the negative rolldown to spot for 

3m2y is 23bp. 

What if the base case scenario is not realised and 

ECB does not hike/the market rallies? Investors who 

wish to purchase insurance for the trade above 

against an expected collapse of rates could buy a 

3m2y receiver swaption. This looks cheap, given the 

steep skew (Chart 1). If cash infusion into the 

position needs to be minimised, investors could 

choose to finance the long receiver swaption position 

with expensive payer swaption. For example, a short 

140 

130 

120 

110 

100 

90 

80 

Chart 1: 3M2Y Smile 

70 

1.5 2.5 3.5 4.5 


Chart 2: Short 3m2y Collar, Short 3m2y Swap 

Terminal PnL Profile 

2.0 

1.5 

1.0 

0.5 

0.0 

-0.5 

-1.0 

1.50 

1.75 

2.00 


94 

92 

90 

88 

86 

84 

82 

80 

78 

76 

2.25 

2.50 

2.75 

Chart 3: 3m2y Implied Vol vs Underlying in 

March 

3m2y implied vol 

2y swap (RHS) 

74 

01 02 03 04 07 08 09 10 11 14 15 16 17 18 21 22 23 

Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar 


3.00 

3.25 

3.50 

3.75 

4.00 

4.25 

4.50 

2.25 

2.20 

2.15 

2.10 

2.05 

2.00 

1.95 

1.90 

1.85 

1.80 

1.75 

Matteo Regesta 24 March 2011 


42 


position in the 2.10-3.00% collar could recently be 

entered for a few cents. In turn, the upside potential 

of trade is capped with max PnL for EUR 100mn 

notional at EUR 1mn if the swap rate settles at 3% in 

turn; the payoff profile is shown in Chart 2. The rate 

needs to increase by 25bp to break even. 

We make a final and key remark: the trade is 

gamma/vega neutral. However, vega would decrease 

in a sell-off (vanna profile implies that vega 

decreases by 9k on a 10bp move). Note that this risk 

profile perfectly suits the current market. Implied 

volatility seems to be negative correlated with the 

level of rates (Chart 3). This is unusual given the 

current phase of the cycle but we expect such 

dynamics to persist for some time as a result of the 

legacy of recent exogenous shocks (e.g. Japan 

earthquake/tsunami, MENA unrest). 

Matteo Regesta 24 March 2011 


43 


JGBs: Several Factors to Weigh 

• Over the medium term, the 11 March 

earthquake/tsunami will result in enormous 

damage to the JGB market. 

• First, the shrinking output gap will put 

upward pressure on the CPI. 

• Second, reconstruction demand and a 

higher fiscal burden will lead to more JGB 

issuance. 

• Third, since the earthquake is causing 

financial bottlenecks, the corporate cash 

surplus will shrink, leading to the decline in 

excess liquidity that has been supporting 

JGBs. 

Shrinking output gap will prompt higher CPI 

Reflecting the earthquake effects, the JGB market 

will probably remain firm, if somewhat unsettled. 

JGBs will be supported in the near term by 1) the 

slumping real economy, 2) the emergency easing 

measures introduced by the BoJ and 3) flight-toquality 

effects in financial markets. However, JGBs 

face surprising resistance on the upside, as already 

seen this past week. This is because investors are 

anticipating reconstruction demand and higher future 

fiscal burdens. Moreover, we expect the impact of 

these negative factors to grow over time. 

Over the medium term, we expect the 

earthquake/tsunami to result in enormous damage to 

the JGB market. The most severe harm will result 

from a shrinking output gap. Distribution bottlenecks 

– as well as panic buying – are causing local 

shortages of goods such as petrol and batteries. We 

expect supply constraints to persist in coming 

months, putting upward pressure on prices. 

Rising fiscal burden will lead to more issuance 

We also cannot overlook the damage caused by a 

rising fiscal burden. The 1995 Kobe Earthquake 

resulted in three supplementary budgets totalling 

JPY 3.4trn. Since damage from the 11 March quake 

is already estimated to be more than double that of 

Kobe, government spending on reconstruction will 

mount accordingly. It is unrealistic to expect tax 

increases to cover the total rise in expenditure so the 

government will have to increase JGB issuance by 

several trillion yen, even if it appropriates some 

portion of reserve funds and funds for child 

allowances. 

There have already been some calls for the BoJ to 

underwrite reconstruction bonds issued by the 

Chart 1: Japanese Corporate Cash Flow and 

Capital Expenditure (All Companies) 

(¥trn, 7 4QMA) 

6 

5 

4 

3 

2 

1 

0 

-1 

1980 1985 1990 1995 2000 2005 2010 


Cash flow 

Capital expenditure 

All manufacturers 

government on an emergency basis. However, 

should the government rush ahead with measures 

associated with monetisation, financial markets could 

interpret this as hoisting a white flag in the face of the 

disaster. The debate about the BoJ underwriting 

JGBs is itself a negative for both the JPY and the 

JGB market. Because the Japanese economy runs a 

current account surplus and enjoys a savings 

surplus, the government should in our view first issue 

construction bonds and deficit bonds directly to the 

market. 

Excess liquidity will diminish 

Private-sector demand for funds will be the third 

source of damage to the market. In addition to 

distribution and power bottlenecks, the earthquake is 

causing financial bottlenecks. Although the BoJ is 

continuing to supply liquidity through emergency 

easing measures, companies may well have 

problems raising funds, particularly through March 

book closings, due to earthquake damage. The 

corporate sector in particular has increased its 

discretionary cash flow during the post-Lehman 

economic recovery but this will change as time 

passes. 

Corporate expenditure on plant and equipment has 

been picking up since last year. Given the substantial 

discretionary cash flow of domestic corporations, 

they will be compelled to increase investment to 

restore existing facilities, move factories and 

headquarter operations, and rebuild distribution 

infrastructures. This increased investment will reduce 

the cash surplus of the corporate sector. In other 

words, excess liquidity, which has supported JGBs, 

will diminish. Therefore, while JGBs should remain 

firm through Q2, they will face a correction phase 

from the middle of the year. 

Koji Shimamoto 24 March 2011 


44 


JGBs: Trade Recommendations 

• The Nikkei 225 dropped below 8,300 at one 

point last week on flight-to-quality trades 

triggered by the 11 March earthquake/tsunami, 

but has since recovered to around 9,400. 

45 

40 

Chart 1: Current Account Balances 

(JPY trn) 

• The JGB market has also seen a reversal in 

the super-long swap spreads and a decline in 

the somewhat excessive premium that had 

been priced into futures. The USD/JPY 

exchange rate has rebounded to around 81 on 

G7 yen-selling intervention after repatriation 

concerns had driven it through the 77 mark to 

a new all-time low. 

• Markets are likely to remain volatile for 

some time amid very high levels of headline 

risk. This week we set out our latest trade 

recommendations. 

35 

30 

25 

20 

15 

10 

5 

0 

Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 


Chart 2: JGB 2y vs OIS 2y 

0.50 

60 

Outright long positions in short-end JGBs 

The Bank of Japan has injected more than JPY 100 

trillion into financial markets since 14 March, in line 

with its emergency quantitative-easing measures, 

and is expected to keep monetary conditions highly 

accommodative for the near future. BoJ current 

account balances rose to a seven-year high of JPY 

41.8 trillion on 23 March, but short-end JGBs 

currently look quite cheap – both outright and versus 

overnight indexed swaps following a temporary selloff 

to secure cash and a decline in OIS rates. The 

lead-up to today's (24 March) 2y auction may also 

have created a certain amount of selling pressure, 

but the auction result was robust. We continue to 

recommend long positions in short-end JGBs. 

5s10s JGB steepener 

The Cabinet Office announced on 23 March that it 

expects the 11 March earthquake and tsunami to end 

up costing between JPY 16 trillion and JPY 25 trillion 

in terms of direct economic damage. This would 

make it considerably more expensive than the Great 

Hanshin-Awaji Earthquake of January 1995 (around 

JPY 10 trillion) and suggests that substantial 

payments will be needed from the national coffers. 

The Cabinet Office also indicated that FY 2011 GDP 

is likely to be reduced by between JPY 1.25 trillion 

and JPY 2.75 trillion (around 0.2-0.5%) due to 

distribution delays. However, these estimates do not 

take into account the impact of rolling power 

stoppages following the shutdown of TEPCO 

Fukushima Daiichi and Daini nuclear power plants. It 

is therefore likely that actual economic losses will 

0.45 

0.40 

0.35 

0.30 

0.25 

0.20 

0.15 

0.10 

OIS 2y (LHS, %) 

JGB 2y (LHS, %) 

0.05 

Spread (RHS, bp) 

0.00 

Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 

Source: Bloomberg, BNP Paribas 

2.50 

2.00 

1.50 

1.00 

0.50 

Chart 3: 5s10s JGB Steepener 


0.00 

Jan07 Jul07 Jan08 Jul08 Jan09 Jul09 Jan10 Jul10 Jan11 

Source: Bloomberg, BNP Paribas 


Spread (RHS, bp) 

prove to be even greater, particularly if the 

government is forced to pay compensation to those 

affected by ongoing radiation leaks. 

Supply/demand conditions in the long-term and 

super-long sectors look likely to deteriorate amid 

concerns that an emergency supplementary budget 

50 

40 

30 

20 

10 

0 

100 

90 

80 

70 

60 

50 

40 

30 

Tomohisa Fujiki / Masahiro Kikuchi 24 March 2011 


45 


will necessitate higher levels of issuance. We 

therefore expect to see further steepening pressure 

on the JGB yield curve. The 5s10s spread has 

remained within its post-December range of 70–75bp 

despite the events of 11 March, and we recommend 

a target level of 80bp while acknowledging the 

possibility that the 5y sector might lag temporarily if 

the market continues to rally. 

0 

-10 

-20 

-30 

-40 

Chart 4: 3s5s10s Swap Butterfly 

Pay 3s5s10s swap butterfly 

We recommended paying a 3s5s10s butterfly in 

swaps on 10 March (i.e. before the earthquake), 

citing the likelihood that the belly of the curve will 

underperform in the medium term as the economy 

continues to recover; a relatively low carry cost; and 

a historically attractive level. 5s have outperformed 

during the subsequent market surge, but with the 

butterfly spread now approaching its all-time low, we 

stand by our original recommendation as a long-term 

strategic play with an attractive risk/reward profile. 

Moreover, the carry is now almost flat on a 6m 

horizon. 

Other recommended investment strategies 

Our economics team predicts that Japan will face 

growing inflationary pressure as a consequence of 

rising global commodity prices and local supply 

shortages. Inflation-indexed JGBs (linkers) may be 

worth considering given that a higher CPI would 

translate into higher coupon income irrespective of 

the supply/demand balance. However, linkers do 

indeed tend to underperform nominal JGBs during 

flight-to-quality phases. The Ministry of Finance is 

currently scheduled to buy back JPY 150 billion in 

JGB linkers in the April-June quarter, while the BoJ is 

set to purchase a further JPY 40 billion. Outstanding 

issuance continues to steadily decline (with new 

offerings remaining on hold), but the JGB linker 

market is still highly illiquid. This reflects an 

extremely high level of uncertainty over factors such 

as the sustainability of commodity-driven inflation, 

the future of the Fed's QE2 programme (currently 

scheduled to end in June), ECB rate hikes and a 

rebasing of the Japanese CPI from 2005 to 2010 in 

August this year. 

-50 

-60 

-70 

-80 

Jan01 Jan02 Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 


Table 1: Economic Forecasts 

2011 2012 

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 

Real GDP (QoQ) -1.0 -2.6 1.5 2.5 0.5 0.5 0.3 0.3 

(QoQ Ann.) -4.0 -10.0 5.9 10.5 1.9 2.1 1.1 1.1 

CPI Core (YoY) -0.2 0.7 1.3 1.2 1.1 0.8 0.7 0.6 


Table 2: JGBi Outstanding (as of Feb 2011, JPY 

100 million) 

Holder 

Issue MOF BOJ Market 

JBI1 998 0 3 995 

JBI2 2,995 2,098 90 807 

JBI3 5,004 2,701 435 1,868 

JBI4 5,282 3,723 567 992 

JBI5 5,435 3,867 159 1,409 

JBI6 5,084 3,488 699 897 

JBI7 4,997 3,788 341 868 

JBI8 9,996 5,500 636 3,860 

JBI9 4,997 1,898 358 2,741 

JBI10 10,334 6,117 847 3,370 

JBI11 5,044 2,433 358 2,253 

JBI12 10,254 4,961 519 4,774 

JBI13 5,005 2,874 203 1,928 

JBI14 10,133 5,444 1540 3,149 

JBI15 5,395 2,924 265 2,206 

JBI16 10,493 4,421 326 5,746 

101,446 56,237 7,346 63,583 

Source: MOF, BoJ, BNP Paribas 

We also expect Japan's near-term economic slump 

to be somewhat deeper than the apparent market 

consensus, in which case JGB yields could 

accelerate lower over the coming weeks. However, 

fiscal concerns are likely to put yields under a certain 

amount of upward pressure in the second half of this 

year as attention starts to focus on how the 

government will finance the post-quake rebuilding 

process. Those who agree with these views may 

therefore consider buying short expiry OTM receivers 

or OTM calls on JGB futures. 

Tomohisa Fujiki / Masahiro Kikuchi 24 March 2011 


46 


Global Inflation Watch 

Eurozone HICP Inflation: Higher Again 

Chart 1: Eurozone HICP Energy vs Oil 

The release of the preliminary data for German 

CPI/HICP and the flash estimate for the eurozone 

HICP will the coming week’s data focus. 

In both cases, our expectations are moderately 

higher than the market consensus, reflecting the 

anticipation of an acceleration in energy prices linked 

in particular to the housing component and some 

pressures from the ‘seasonal’ components of the 

core index such as clothing. The methodological 

changes introduced in January in a number of 

countries have exacerbated seasonal movements. 

This has probably depressed the outcome in January 

and February, implying some payback in March’s 

data. 

More specifically, we expect headline eurozone 

inflation to accelerate again in March, to stand at 

2.5% y/y – the highest since October 2008. 

Source: Reuters EcoWin Pro, BNP Paribas 

Chart 2: Eurozone HICP Food vs Restaurants & 

Hotels 

In the breakdown, food inflation is forecast to 

continue accelerating, as the HICP catches up with 

the surge in agricultural commodities. We expect 

further upside beyond March, helping to push 

headline inflation yet higher. 

Similarly, energy price inflation is likely to accelerate 

by ½ percentage point to 13.5% y/y. The extent of 

the acceleration is likely to be limited by base effects 

due to the sizeable increase posted this time last 

year. 


Finally, core inflation is likely to be stable at 1.0% y/y, 

though with risks skewed to the upside. In particular, 

we expect clothes inflation to accelerate – again 

reflecting a catch-up with the jump in raw materials 

prices and the seasonal factors mentioned above. 

3 

2 

Chart 3: Japanese CPI (% y/y) 

Core CPI 

The weekly calendar includes the Japanese February 

CPI. In January, the rate of decline in the national 

core CPI eased 0.2pp from December to -0.2% y/y, 

as the index has improved faster than expected. 

The Tokyo CPI numbers for February suggest the 

national index will deteriorate slightly to -0.3% y/y in 

February. But the trend remains one of 

improvements, thanks to resurgent commodities 

prices, led by oil. We expect the core CPI’s negative 

margin will narrow again in March, followed by small 

positive price rise in April. 

1 

0 

-1 

-2 

-3 

CPI excluding energy and 

food, but not alcohol 

02 03 04 05 06 07 08 09 10 11 


Luigi Speranza / Eoin O’Callaghan / Alan Clarke 24 March 2011 


47 


Table 1: BNP Paribas' Inflation Forecasts 

Eurozone 

France 

US 

Headline HICP Ex-tobacco HICP 

Headline CPI 

Ex-tobacco CPI 

CPI Urban SA CPI Urban NSA 

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y index % m/m % y/y Index % m/m % y/y Index % m/m % y/y 

2010 109.8 - 1.6 109.5 - 1.5 121.1 - 1.5 119.8 - 1.5 218.1 - 1.6 218.1 - 1.6 

2011 (1) 112.8 - 2.7 112.4 - 2.6 123.8 - 2.2 122.3 - 2.1 224.2 - 2.8 224.2 - 2.8 

2012 (1) 115.0 - 2.0 114.5 - 1.8 126.1 - 1.9 124.5 - 1.8 228.3 - 1.8 228.2 - 1.8 

Q1 2010 108.6 - 1.1 108.3 - 1.0 120.3 - 1.3 119.0 - 1.2 217.5 - 2.4 217.0 - 2.4 

Q2 2010 110.1 - 1.6 109.8 - 1.5 121.3 - 1.6 120.0 - 1.5 217.3 - 1.8 218.1 - 1.8 

Q3 2010 109.9 - 1.7 109.6 - 1.7 121.2 - 1.5 119.8 - 1.5 218.0 - 1.2 218.3 - 1.2 

Q4 2010 110.8 - 2.0 110.5 - 2.0 121.7 - 1.6 120.2 - 1.6 219.5 - 1.2 218.9 - 1.3 

Q1 2011 (1) 111.2 - 2.4 110.9 - 2.3 122.5 - 1.8 121.0 - 1.7 222.2 - 2.1 221.6 - 2.1 

Q2 2011 (1) 112.8 - 2.5 112.4 - 2.4 123.8 - 2.0 122.3 - 2.0 223.3 - 2.8 224.1 - 2.8 

Q3 2011 (1) 113.0 - 2.8 112.6 - 2.8 124.1 - 2.4 122.6 - 2.3 224.8 - 3.1 225.0 - 3.1 

Q4 2011 (1) 114.1 - 3.0 113.7 - 2.9 124.8 - 2.5 123.2 - 2.5 226.6 - 3.3 225.9 - 3.2 

Jul 10 109.6 -0.4 1.7 109.30 -0.4 1.7 121.0 -0.3 1.7 119.68 -0.3 1.6 217.6 0.3 1.3 218.01 0.0 1.2 

Aug 10 109.9 0.2 1.6 109.52 0.2 1.5 121.3 0.2 1.4 119.97 0.2 1.3 218.1 0.2 1.2 218.31 0.1 1.1 

Sep 10 110.2 0.3 1.9 109.86 0.3 1.8 121.2 -0.1 1.6 119.88 -0.1 1.5 218.4 0.2 1.1 218.44 0.1 1.1 

Oct 10 110.5 0.3 1.9 110.19 0.3 1.9 121.4 0.1 1.6 120.03 0.1 1.5 219.0 0.2 1.2 218.71 0.1 1.2 

Nov 10 110.6 0.1 1.9 110.28 0.1 1.8 121.5 0.1 1.6 120.09 0.0 1.5 219.2 0.1 1.1 218.80 0.0 1.1 

Dec 10 111.3 0.6 2.2 110.93 0.6 2.1 122.1 0.5 1.8 120.61 0.4 1.7 220.2 0.4 1.4 219.18 0.2 1.5 

Jan 11 110.5 -0.7 2.3 110.11 -0.7 2.2 121.8 -0.2 1.8 120.32 -0.2 1.7 221.1 0.4 1.7 220.22 0.5 1.6 

Feb 11 111.0 0.4 2.4 110.57 0.4 2.4 122.4 0.5 1.7 120.90 0.5 1.6 222.3 0.5 2.2 221.31 0.5 2.1 

Mar 11 (1) 112.3 1.2 2.5 111.91 1.2 2.4 123.3 0.8 1.9 121.83 0.8 1.9 223.2 0.4 2.6 223.31 0.9 2.6 

Apr 11 (1) 112.6 0.3 2.4 112.23 0.3 2.3 123.6 0.3 2.0 122.18 0.3 1.9 223.3 0.0 2.6 223.75 0.2 2.6 

May 11 (1) 112.8 0.2 2.5 112.45 0.2 2.4 123.8 0.1 2.0 122.36 0.2 1.9 223.1 -0.1 2.6 223.92 0.1 2.6 

Jun 11 (1) 113.0 0.2 2.6 112.62 0.2 2.6 123.9 0.1 2.1 122.47 0.1 2.0 223.4 0.2 3.0 224.61 0.3 3.0 

Jul 11 (1) 112.6 -0.4 2.7 112.17 -0.4 2.6 123.7 -0.2 2.2 122.21 -0.2 2.1 224.1 0.3 3.0 224.62 0.0 3.0 

Aug 11 (1) 112.9 0.3 2.8 112.53 0.3 2.8 124.2 0.4 2.4 122.72 0.4 2.3 224.7 0.3 3.0 224.98 0.2 3.1 

Sep 11 (1) 113.5 0.5 3.0 113.13 0.5 3.0 124.3 0.1 2.5 122.84 0.1 2.5 225.5 0.4 3.2 225.51 0.2 3.2 

Oct 11 (1) 113.8 0.3 3.0 113.43 0.3 2.9 124.5 0.2 2.6 123.00 0.1 2.5 226.1 0.3 3.3 225.88 0.2 3.3 

Nov 11 (1) 114.0 0.1 3.0 113.55 0.1 3.0 124.7 0.1 2.6 123.13 0.1 2.5 226.5 0.2 3.3 225.94 0.0 3.3 

Dec 11 (1) 114.4 0.4 2.8 114.00 0.4 2.8 125.1 0.3 2.4 123.51 0.3 2.4 227.2 0.3 3.2 226.04 0.0 3.1 

Updated 

Next 

Release 

Mar 24 

Mar Final HICP (Mar 31) 

Mar 17 

Mar CPI (Apr 13) 

Mar 17 


Source: BNP Paribas, (1) Forecasts 

Chart 4: Eurozone Core HICP (% y/y) 

Chart 5: US Core CPI (% y/y) 


Core inflation has been stronger in recent months, mainly reflecting 

gains in core goods inflation. This has further to run. 


Core inflation should trend slowly higher over the course of the year 

as core goods inflation rises on past commodity price surges. 

Shelter has bottomed but is not expected to continue higher at its 

current pace. 



48 



Japan 

UK 

Sweden 

Core CPI SA 

Core CPI NSA 

Headline CPI RPI 

CPI CPIF 

Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y Index % m/m % y/y 

2010 99.3 - -1.0 99.3 - -1.0 114.5 - 3.3 223.6 - 4.6 302.5 - 1.2 194.6 - 2.0 

2011 (1) 99.7 - 0.4 99.7 - 0.4 119.7 - 4.6 236.1 - 5.6 311.7 - 3.0 198.7 - 2.1 

2012 (1) 99.9 - 0.2 99.9 - 0.2 122.6 - 2.3 245.0 - 3.8 318.9 - 2.3 201.8 - 1.6 

Q1 2010 99.8 - -1.2 99.3 - -1.2 112.9 - 3.2 219.3 - 4.0 301.2 - 0.7 193.4 - 2.3 

Q2 2010 99.3 - -1.2 99.3 - -1.2 114.4 - 3.4 223.5 - 5.1 302.8 - 0.9 194.3 - 1.9 

Q3 2010 98.8 - -1.1 99.1 - -1.0 114.7 - 3.1 224.5 - 4.7 302.9 - 1.1 194.2 - 1.7 

Q4 2010 99.3 - -0.5 99.4 - -0.5 115.9 - 3.4 227.0 - 4.7 307.0 - 1.9 196.4 - 2.0 

Q1 2011 (1) 99.5 - -0.2 99.1 - -0.2 117.7 - 4.2 230.9 - 5.3 308.2 - 2.6 196.4 - 1.6 

Q2 2011 (1) 99.7 - 0.4 99.7 - 0.4 119.6 - 4.5 235.8 - 5.5 311.5 - 3.2 198.6 - 2.2 

Q3 2011 (1) 99.7 - 0.9 100.0 - 0.9 120.1 - 4.7 237.3 - 5.7 311.6 - 3.2 198.8 - 2.4 

Q4 2011 (1) 99.8 - 0.5 99.9 - 0.5 121.5 - 4.8 240.6 - 6.0 315.5 - 3.1 200.9 - 2.3 

Jul 10 98.8 -0.4 -1.2 99.0 -0.3 -1.1 114.3 -0.3 3.1 223.6 -0.2 4.8 302.0 -0.3 1.1 193.7 -0.3 1.7 

Aug 10 98.8 0.0 -1.0 99.1 0.1 -1.0 114.9 0.5 3.1 224.5 0.4 4.7 302.1 0.0 0.9 193.7 0.0 1.5 

Sep 10 98.7 -0.1 -1.1 99.1 0.0 -1.1 114.9 0.0 3.0 225.3 0.4 4.6 304.6 0.8 1.4 195.1 0.7 1.8 

Oct 10 99.1 0.4 -0.6 99.5 0.4 -0.6 115.2 0.3 3.1 225.8 0.2 4.5 305.6 0.3 1.5 195.7 0.3 1.8 

Nov 10 99.3 0.2 -0.5 99.4 -0.1 -0.5 115.6 0.3 3.2 226.8 0.4 4.7 306.6 0.3 1.8 196.2 0.2 1.9 

Dec 10 99.5 0.2 -0.3 99.4 0.0 -0.4 116.8 1.0 3.7 228.4 0.7 4.8 308.7 0.7 2.3 197.3 0.6 2.3 

Jan 11 99.5 0.0 -0.2 99.0 -0.4 -0.2 116.9 0.1 4.0 229.0 0.3 5.1 306.2 -0.5 2.5 195.2 -1.1 1.4 

Feb 11 (1) 99.5 0.0 -0.3 98.9 -0.1 -0.3 117.8 0.8 4.3 231.3 1.0 5.5 308.0 0.6 2.5 196.2 0.5 1.3 

Mar 11 (1) 99.6 0.1 -0.2 99.3 0.4 -0.2 118.3 0.4 4.3 232.4 0.5 5.3 310.3 0.7 3.0 197.8 0.9 1.9 

Apr 11 (1) 99.7 0.1 0.4 99.6 0.3 0.4 119.2 0.7 4.4 234.9 1.1 5.4 311.3 0.3 3.3 198.4 0.3 2.2 

May 11 (1) 99.7 0.0 0.4 99.7 0.1 0.4 119.7 0.4 4.6 235.8 0.4 5.5 311.6 0.1 3.2 198.6 0.1 2.1 

Jun 11 (1) 99.7 0.0 0.5 99.8 0.1 0.5 119.9 0.2 4.6 236.6 0.3 5.6 311.6 0.0 3.2 198.7 0.1 2.2 

Jul 11 (1) 99.7 0.0 0.9 99.9 0.1 0.9 119.7 -0.2 4.7 236.1 -0.2 5.6 310.4 -0.4 3.1 198.1 -0.3 2.3 

Aug 11 (1) 99.7 0.0 0.9 100.0 0.1 0.9 120.2 0.4 4.6 236.9 0.3 5.5 310.9 0.2 3.3 198.5 0.2 2.5 

Sep 11 (1) 99.7 0.0 1.0 100.1 0.1 1.0 120.6 0.3 4.9 238.8 0.8 6.0 313.4 0.8 3.2 199.9 0.7 2.5 

Oct 11 (1) 99.7 0.0 0.6 100.1 0.0 0.6 121.1 0.5 5.1 239.9 0.4 6.2 315.0 0.5 3.4 200.6 0.3 2.5 

Nov 11 (1) 99.8 0.1 0.5 99.9 -0.2 0.5 121.3 0.1 4.9 240.4 0.2 6.0 315.5 0.1 3.2 200.8 0.1 2.4 

Dec 11 (1) 99.9 0.1 0.4 99.8 -0.1 0.4 122.0 0.6 4.5 241.4 0.4 5.7 316.1 0.2 2.7 201.2 0.2 2.0 

Updated 

Next 

Release 

Mar 10 

Feb CPI (Mar 24) 

Mar 24 


Mar 10 




Chart 7: UK CPI (% y/y) 


Prices are expected to continue falling. 


We expect inflation to remain well above target for the remainder of 

the year. 



49 



Canada Norway Australia 

CPI Core CPI Headline CPI Core 

CPI 

Core 

Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y Index % q/q % y/y 

2010 116.5 1.8 115.6 1.7 128.8 2.4 120.1 1.4 172.6 2.8 - 2.6 

2011 (1) 119.0 2.2 116.8 1.1 130.9 1.7 121.9 1.5 179.4 3.9 - 2.6 

2012 (1) 122.1 2.6 118.9 1.8 134.0 2.3 124.5 2.2 184.4 2.8 - 2.8 

Q3 2010 116.9 2.2 1.4 116.9 0.3 1.7 128.2 -0.7 1.9 119.9 -0.3 1.2 173.3 0.7 2.8 - - 2.5 

Q4 2010 117.5 2.3 1.8 117.5 2.0 1.7 129.4 0.9 2.2 120.5 0.5 1.0 174.0 0.4 2.7 - - 2.3 

Q1 2011 (1) 118.3 2.1 1.9 118.3 -0.6 1.5 130.0 0.5 1.3 120.3 -0.2 0.8 176.5 1.4 3.4 - - 2.3 

Q2 2011 (1) 119.1 2.4 2.2 119.1 1.7 1.2 130.7 0.5 1.3 121.8 1.2 1.2 178.8 1.3 3.9 - - 2.6 

Q3 2011 (1) 119.3 1.6 2.2 119.3 1.6 1.2 130.8 0.0 2.0 122.1 0.2 1.8 180.5 0.9 4.1 - - 2.7 

Q4 2011 (1) 120.1 2.0 2.2 120.1 2.5 1.1 132.3 1.2 2.3 123.3 1.0 2.3 181.6 0.6 4.2 - - 2.9 

Q1 2012 (1) 121.1 3.3 2.2 121.1 1.4 1.3 132.7 0.3 2.1 123.4 0.1 2.6 182.8 0.7 3.6 - - 2.8 

Q2 2012 (1) 122.0 3.1 2.2 122.0 1.5 1.5 134.0 1.0 2.5 124.7 1.0 2.4 183.6 0.4 2.7 - - 2.7 

Updated 

Next 

Release 

Mar 10 


Mar 10 


Mar 10 

Q1 CPI (Apr 26) 


Chart 8: Canadian Total versus Core CPI 

Chart 9: Australian CPI (% y/y) 

7.0 

6.0 

5.0 

4.0 

3.0 

(% y/y) 

Headline CPI 

Underlying CPI 

2.0 

1.0 

0.0 

-1.0 

Q193 Q195 Q197 Q199 Q101 Q103 Q105 Q107 Q109 Q111 Q113 


Wage pressures appear subdued, suggesting that underlying 

inflation will remain within the target range. 


Food prices should drive headline inflation sharply higher in 2011. 

Underlying inflation should drift higher, but remain within the target 

range. Risks to inflation are to the upside, particularly in the near 

term. 

CPI Data Calendar for the Coming Week 

Day GMT Economy Indicator Previous BNPP F’cast Consensus 

Fri 25/03 23:30 Japan CPI National y/y : Feb 0.0% 0.0% 0.0% 

23:30 Core CPI National y/y : Feb -0.2% -0.3% -0.3% 

23:30 CPI Tokyo y/y : Mar -0.1% 0.0% -0.1% 

23:30 

(24/03) 

Core CPI Tokyo y/y : Mar -0.4% -0.3% -0.3% 

Tue 29/03 Germany States’ Cost of Living m/m : Mar 0.5% 0.5% 0.5% 

States’ Cost of Living y/y : Mar 2.1% 2.2% 2.2% 

HICP (Prel) m/m : Mar 0.6% 0.6% 0.4% 

HICP (Prel) y/y : Mar 2.2% 2.3% 2.1% 

Wed 30/03 07:00 Spain HICP Flash y/y : Mar 3.4% 3.5% n/a 

09:15 Belgium CPI m/m : Mar 0.6% 0.4% n/a 

09:15 CPI y/y : Mar 3.4% 3.4% n/a 

Thu 31/03 09:00 Eurozone HICP (Flash) y/y : Mar 2.4% 2.5% 2.3% 

09:00 Italy CPI (NIC, Prel) m/m : Mar 0.3% 0.3% n/a 

09:00 CPI (NIC, Prel) y/y : Mar 2.4% 2.4% n/a 

09:00 HICP (Prel) m/m : Mar 0.2% 1.7% n/a 

09:00 HICP (Prel) y/y : Mar 2.1% 2.3% n/a 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 




50 


Inflation: Cash and Carry 

• GLOBAL: Still bullish front-end EUR & UK. 

Chart 1: 5y EUR Inf Swap vs. NY, Brent & EQ 

• EUR: Stay long front BEs. BTPei-16 a buy. 

• USD: Buy 5y5y BE swap fwd at 10y auction. 

• GBP: Stay long front cash BEs & 30y RPI. 

GLOBAL: Nominal yields and oil prices are back at 

their highs (Chart 1), with some tightening in 

Brent/WTI spread – Chart 2. MENA tensions are 

escalating allowing crude to reach new local highs 

above USD 106/bbl. Equity and interest rate volatility 

indices have also almost returned to their lows. 

Macroeconomic data released do not yet reflect the 

Japanese disaster. UK RPI came out much stronger 

than expected and the focus is still on food and 

energy prices in international media. Next week will 

see the first evidence of strong eurozone inflation for 

March via German prel. data releases and the flash 

estimate. Given the strong positive carry – partly 

seasonal and commodity driven – and ongoing 

escalation risks of MENA tensions, the rebound in 

front-end breakevens (Chart 3) is rational and there 

is more to come in our view. Thus, we continue to 

favour front-end inflation exposure in the UK and 

Europe. This said, equities are still 3-6% below their 

mid-February highs and agriculture indices are 8% 

below their highs of early March. In the US, more of a 

risk premium due to oil is seemingly priced in TIPS 

whilst the 7y+ sector has suffered ahead of supply – 

hence we favour 3y and 10y maturities there. In 

terms of supply, next Tuesday will see a EUR 1.25- 

1.75bn BTPei-16 tap. 

EUR: Inflation breakevens have continued to 

recover, with a flattening bias. As a reminder, in 

March, breakevens are rising in order to offset the 

negative carry (-20bp for BTPei-16 for instance) and 

to price in the positive carry of April and May (+3bp 

and +19bp respectively). Between 24-Feb value date 

(1 March settlement date) and 24 March (29 March 

settlement date), EUR and FRF breakevens have not 

significantly overshot as illustrated in Chart 4. Having 

said that, assuming a stabilisation in oil prices, we 

still see more value at the front end of the inflation 

curve than at the long end. The regression of 

breakeven vs. nominal yield, oil and EURUSD shows 

that 2012 breakevens could rise further ahead of 

strong positive carry. We keep our call for a flatter 

breakeven curve in Euroland. 

Chart 2: Oil vs. BRENT/WTI Spread & Crack 

Chart 3: Carry-adj BE moves since 10-March 

4: Residuals (BE vs NY+Oil+EURUSD) vs Carry 

80 

60 

40 

20 

0 

-20 

-40 

BTPEI12 Breakeven / BRENT / EURUSD Residuals 

1m Carry 

Fwd Carry 

-60 

-60 

Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 

BTPEI12 Breakeven / BRENT / EU Yield Move Carry P&L ? 

1m 26.6 5.5 32.1 

2m -29.3 76.4 47.1 

3m -41.2 91.3 50.1 

80 

60 

40 

20 

0 

-20 

-40 

All Charts Source : BNP Paribas, Bloomberg 

Shahid Ladha / Herve Cros / Sergey Bondarchuk 24 March 2011 


51 


Next week, Italy will tap EUR 1.25-1.75bn of the EUR 

2.8bn BTPei-16. This will be its first tap and it should 

be well received, especially as it looks at least 6bp 

cheap on the BTPei curve. Chart 5 shows ASW 

discounts without inflation floors. Even discounting 

for the deflation floor, the BTPei16 looks cheap. We 

would overweight BTPei-16, -19 and -21 vs. BTPei- 

14, -17 and -23. The BTPei-23 is especially rich in 

our view. Chart 5 also highlights the cheapness of 

the OATi-13 and BTANi-16. 

On the demand side, we have data from Holland 

regarding pension funds and France regarding Livret 

A. In Holland, funding ratios improved significantly in 

Q4 2010, moving from 99% to 107%. We estimate 

them at around 105% currently. In Q4, Dutch pension 

funds were net sellers of EUR 20bn of government 

bonds (including EUR 15bn of derivatives) but have 

little invested in inflation assets, with more buying 

activity in swap than cash according to the DNB. We 

expect more investments in linkers reported for Q1 

2011, given the increasing focus on longevity risks. 

However, uncertainties regarding a change of 

regulation and potential 30y BUNDei could weigh on 

investments. The move in nominal derivatives could 

have many explanations, one of them being the 

increasing unpopularity of derivatives. This would 

benefit the launch of a 30y BUNDei. In that context, 

Germany announced its intention to issue EUR 2-3bn 

of linkers in Q2. In our view, this is purely indicative 

and does not prevent Germany from issuing EUR 

3bn or more of a new 30y BUNDei. 

In France, after two strong months, inflows reached 

only EUR 1.6bn in Livret A + Livret Bleu + LDD 

savings products (Chart 7). This is unlikely to have a 

significant impact. Noticeably, 2019+ OATi ASW has 

richened significantly and now offers limited value vs. 

OATei (Chart 8). As said before, this is still not yet 

the case for the OATi-13 and BTANi16, which 

continue to offer around 20bp of pick-up vs. OATei 

ASW curve. The tightening of the OATi/OATei ASW 

spread is mainly due to the move in the swap curve. 

At -15bp to -20bp, the 10y EUR/FRF inflation 

breakeven spread still looks too low in absolute 

terms. However, it is at the middle of its post-Lehman 

range and uncertainties on peripherals and Germany 

inflation suggest there is little potential either way. At 

this stage, being long EUR vs. FRF inflation is more 

a long-term carry trade than a tactical trade. As far as 

cash breakevens are concerned, OATei will benefit 

from a 1.20% increase in HICP in March vs. +0.8% 

expected in France. Next Thursday, the flash 

estimate for March HICP will be released. The 

market seems to expect 2.3% y/y vs. 2.53% for BNP 

Paribas. This justifies our bullish stance on 

breakevens. 

Chart 5: Real/Nominal ASW Discounts, Without 

floors 

40 

30 

20 

10 

0 

OATi 

OATei 

Bundei 

BTPei16 

BTPei 

ASW Discounts (z-spds, excl. floor) 

-10 

-10 

Apr-11 Apr-16 Apr-21 Apr-26 Apr-31 Apr-36 Apr-41 

Chart 6: Quarterly changes in Inflation and non 

inflation linked bonds vs Funding ratio 

EUR % 

20 

185 

15 

10 

5 

0 

-5 

-10 

-15 

-20 

Inflation Assets 

Government bond, not 

indexed linked 

Funding Ratio, RHS 

-25 

5 

07-Q1 07-Q3 08-Q1 08-Q3 09-Q1 09-Q3 10-Q1 10-Q3 11-Q1 

Chart 7: Livret A rate vs. Livret A Flows 

EUR bn Livret A + Livret Bleu + LDD Monthly flows 

% 

25 

Livret A rate 

4.5 

20 

15 

10 

-5 

-10 

-15 

1.0 

Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 

60 

30 

0 

5 

0 

Chart 8: Real/Nominal ASW Discounts, with 

floors 

OATI19 Real ASW 

-30 


All Charts Source : BNP Paribas, Bloomberg 

OATEI20 Real ASW 

BUNDEI20 Real ASW 

40 

30 

20 

10 

0 

165 

145 

125 

105 

85 

65 

45 

25 

4.0 

3.5 

3.0 

2.5 

2.0 

1.5 



52 


GBP: UK RPI surprised to the upside for the 18 th 

time in 24 months, at 231.3, +1% m/m, 5.5% y/y and 

0.3pp above consensus. Core CPI printed 3.4% y/y 

vs. consensus of 3.1%. This was not just a lagged 

impact of VAT hike – CPIY (ex. taxes) rose to 2.83% 

from 2.4% in Jan and 2% in Dec. Clothing and 

footwear (women’s clothes especially) surprised to 

the upside. Unfortunately, we got stopped out of our 

long UKTi-16 BE call following FTQ pressures after 

the Japanese disaster but we could easily see a 

further 10-20bp widening in 5y cash breakevens from 

here. Chart 9 shows the regression of UKTi-17 

breakeven vs. nominal yields, Brent in GBP and 

carry and suggests significant upside potential 

ahead. The risk, as we experienced, is that the 

market is already long. The FY 11/12 DMO Remit 

showed gilt issuance will be unchanged (vs. Pre 

Budget Remit) at GBP 169bn, but higher than 

consensus of around GBP 161bn. The split of gilt 

issuance shows an increase of linker supply by 2.5% 

to GBP 38.4bn and more short-dated gilts but fewer 

mediums and longs – see Table 1. The news 

weighed on breakevens across the curve with signs 

of ongoing profit-taking. The GBP 38.4bn will consist 

of 15 auctions to raise GBP 18.6bn resulting in a 

greater average auction size of GBP 1.2bn. Still, 52% 

of linker issuance is expected to come from 

syndication (and mini-tenders) although the DMO 

stays more flexible on distribution type than 

maturity/instrument split. Despite the rally in gilts and 

fall in breakevens post Remit, 20y+ ASW discounts 

tightened on the day. This makes little sense given 

the distribution of gilt issuance and the richness of 

cash vs. swap breakevens. We expect wider ASW 

discounts, especially around the extreme 30y point. 

With respect to the Budget, the most pressing impact 

is the abandonment of the planned increase in petrol 

duty from April and an immediate reduction by 1p. 

This should have a minimum impact on our 

economists’ forecasts given the continued rise in oil 

prices. 

USD: Oil continues to support the front end of the 

inflation curve, while supply weighs on longer 

maturities. Since the beginning of the year, the 2s10s 

BE flattened by almost 80bp (Chart 10) with the 

flattener supported by positive carry. While the 2s10s 

BE steepener may look tempting in the US, the carry 

profile is prohibitive (at least vs our economists’ 

forecast). Even so, the front end looks rich, pricing in 

the risk premium of higher oil prices, while longer 

maturities offer better value and the 10y sector 

already looks slightly cheap vs. nominals/oil. The 10y 

sector has also underperformed the 30y sector since 

the beginning of March and we like 10/30s BE 

flattener after supply, especially considering the 

positive carry (Chart 11). Finally, the 10y sector looks 

cheap vs. 5y as well and our favourite trade is to buy 

5y5y fwd BE post supply, which looks too low 

considering the upside risk of inflation in the medium 

Chart 9: UKTi-17 BE Residuals vs. NY/Brent & 

Carry 

30 

20 

10 

0 

-10 

-20 

-30 

UKTI17 Breakeven / BRENT Residuals 

1m Carry 

Fwd Carry 

Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 

UKTI17 Breakeven / BRENT Resid Yield Move Carry P&L ? 

1m 5.7 9.6 15.3 

2m 14.8 13.4 28.2 

3m 5.2 26.3 31.5 

Table 1: FY 11/12 Gilt Issuance vs. FY 10/11 

Sector Short Medium Long Linker Total % change 

2010/11 53 38 41 34 165 -27.0% 

2011/12 58 34.9 37.7 38.4 169 + 2.4% 

Sector % Short % Medium % Long % Linker 

2010/11 32.1% 23.0% 24.8% 20.6% 

2011/12 34.3% 20.7% 22.3% 22.7% 

% Difference 2.2% -2.4% -2.5% 2.1% 

Chart 10: US 10y Underperforms vs. 2y and 30y 

70 

60 

50 

40 

30 

20 

TIIJAN20 / TIIFEB40 Breakeven 

TIIJUL13 / TIIJUL20 Breakeven Rhs 

10 

-20 

Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 

Chart 11: 5y5y Too Low Considering the Risks 

3.25 

3.00 

2.75 

2.50 

2.25 

2.00 

1.75 

1.50 

5y5y BE 

Last Value 

06 07 08 09 10 11 

All Charts Source: Bloomberg, BNP Paribas 

term courtesy of the growing economy, easy 

monetary policy and already-accelerating inflation. 

30 

20 

10 

0 

-10 

-20 

-30 

120 

100 

80 

60 

40 

20 

0 



53 


Table 1: BNP Paribas Carry Analysis 

Benchmark Carry 

Pricing Date 

24-Mar-11 

Term 1 

Term 2 

3m 

6m 

12m 

Repo Rate 

0.42% 0.41% 0.34% 0.34% 0.56% 

Sett. Date 

25-Mar-11 01-May-11 01-Jun-11 

27-Jun-11 

26-Sep-11 

26-Mar-12 

Yield BE Real BE Real BE Real BE Real BE Real BE 

Short-end 

OATei Jul-12 -1.58% 2.93% 10.4 5.3 100.6 90.7 113.4 100.1 54.5 33.9 -166.2 -77.2 

OATI Jul-13 -0.35% 2.17% 16.0 11.2 48.3 38.9 58.0 45.1 46.4 23.0 35.4 35.4 

TIPS Jul-12 -2.51% 2.93% 27.0 24.9 89.4 85.2 93.6 87.5 90.1 75.8 41.4 3.0 

UKTi Aug-13 -1.97% 3.25% 11.7 7.8 50.5 43.3 60.7 51.0 55.0 37.1 112.6 80.4 

5y 

OATei Jul-15 0.30% 2.21% 7.3 3.1 37.0 28.9 42.9 31.6 37.8 16.6 41.9 3.0 

OATi Jul-17 0.74% 2.27% 7.5 3.7 20.3 13.1 24.7 14.6 24.4 5.3 30.0 30.0 

TIPS Apr-15 -0.56% 2.26% 13.4 9.2 35.5 27.8 39.4 28.5 48.5 26.1 68.9 20.3 

UKTi Jul-16 -0.26% 2.91% 8.9 4.6 29.3 21.4 36.0 25.2 41.6 20.6 80.0 38.5 

JGBI-4 June-15 0.84% -0.42% -5.4 -6.2 6.2 4.7 14.9 13.0 39.9 35.8 57.2 48.2 

10y 

OATei Jul-20 1.28% 2.24% 4.7 1.4 20.2 14.0 23.8 15.1 23.9 7.3 31.2 0.3 

OATI Jul-19 1.06% 2.31% 6.2 2.7 16.4 9.8 20.1 10.8 20.8 3.1 27.1 27.1 

TIPS Jul-20 0.86% 2.40% 7.7 3.6 19.0 11.4 21.8 11.2 29.4 8.2 45.1 1.8 

UKTi Nov-22 0.56% 3.17% 10.1 6.5 14.7 8.1 23.5 14.5 30.3 12.6 48.3 13.9 

JGBI-16 June-18 1.28% -0.51% -2.5 -3.7 5.0 3.1 10.6 8.1 26.7 21.5 38.7 27.7 

30y 

OATei Jul-40 1.68% 2.45% 1.9 0.1 7.7 4.2 9.1 4.3 9.4 0.2 12.5 -4.4 

OATI Jul-29 1.67% 2.38% 3.8 1.3 9.8 5.1 12.2 5.5 13.5 0.9 18.6 18.6 

TIPS Feb-40 1.86% 2.61% 3.6 0.8 8.5 3.4 9.9 2.8 13.9 -0.1 21.8 -5.9 

UKTI Mar-40 0.74% 3.55% 4.1 1.8 5.9 1.8 9.4 3.7 12.1 1.1 18.9 -2.2 

Short-end 

Term 1 -> Term 2 Term 2 -> 3m 

3m -> 6m 

6m -> 12m 

OATei Jul-12 90.3 85.4 19.0 15.3 -59.0 -66.2 -220.6 -111.1 

OATI Jul-13 32.3 27.7 11.5 7.6 -11.6 -22.1 -11.1 12.4 

TIPS Jul-12 62.4 60.3 19.1 16.6 -3.5 -11.6 -48.7 -72.9 

UKTi Aug-13 38.9 35.5 10.9 7.7 -5.7 -13.9 57.7 43.3 

5y 

OATei Jul-15 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 

OATi Jul-17 29.7 25.8 7.9 4.4 -5.1 -15.0 4.1 -13.6 

TIPS Apr-15 12.8 9.4 5.1 2.0 -0.3 -9.3 5.7 24.8 

UKTi Jul-16 22.1 18.5 8.9 5.0 9.2 -2.4 20.4 -5.8 

JGBI-4 June-15 11.6 10.9 11.8 11.2 25.0 22.9 17.4 12.4 

10y 

OATei Jul-20 15.5 12.5 4.6 1.9 0.1 -7.7 7.3 -7.1 

OATI Jul-19 10.3 7.1 4.3 1.4 0.7 -7.7 6.2 23.9 

TIPS Jul-20 11.3 7.8 5.3 1.6 7.6 -3.0 15.7 -6.5 

UKTi Nov-22 4.6 1.6 9.9 6.7 6.7 -1.8 18.0 1.2 

JGBI-16 June-18 7.6 6.7 7.6 6.8 16.1 13.4 12.0 6.2 

30y 

OATei Jul-40 5.8 4.2 1.8 0.3 0.3 -4.0 3.1 -4.7 

OATI Jul-29 6.0 3.8 2.7 0.6 1.3 -4.6 5.2 17.8 

TIPS Feb-40 4.9 2.5 2.5 0.0 4.0 -2.9 7.9 -5.8 

UKTI Mar-40 1.8 -0.1 3.9 2.0 2.7 -2.7 6.8 -3.3 




54 


Technical Analysis – Interest Rates & Commodities 

Bond & Short-Term Contracts 

• Europe 10y: Toppish but must break now below key 3.06/3.11 to strengthen a ST falling scenario again 

• US 10y: Must sustain break below key 3.37 (MT 61.8% & wave “A” low) to resume last ST falling bias 

• Short-term contracts u1: Supportive but ST toppish tone on ED while Euribor is still bottoming/slightly up ST 

Equities & Commodities 

• WTI (Cl1): Up MT within LT rising channel & slightly above critical 103.39 (LT 61.8%) but risk of 2-top on 107 area 

• Equity markets: ST study turned toppish/consolidative but wider correction is still needed to turn negative MT 

US 10y: Positive ST but must move again below key 3.37 (MT 61.8%) MT Trend: Up/Toppish Range: 3.22/3.42 

MT SCENARIO remains up 

Market remains up oriented MT within a LT 

rising “C of ABC” scenario which is likely to 

send it towards key 4.00/4.07 (April top & LT 

61.8%) initially and perhaps then key 4.56 (LT 

falling channel res). However, a renewed 

break above key 3.37 (MT 61.8%) & 3.52/ 

3.55 (61.8%+4-year falling res) is now 

needed to rekindle MT bearish scenario 

2.88 3.77 => 4.00/4.07 

ALTERNATIVE SCENARIO...ST correction 

It failed to extend the rise beyond 3.55 (LT 

falling resistance line) & started a ST consolidation 

strengthened by the move back seen 

below key 3.37 (MT 61.8% & wave “A” low) 

with 3.22 (ST 38.2% & wave “C” mini target) 

reached, next target being now 3.05 (MT 

50%). 

STRATEGY 

Flat could use rebound on 3.37 S/L 3.42 now 

to re-enter long for 3.10/3.20 

US/EUR 10y bond: Within main falling wave with wave “3” developing MT Trend: Down Range: 5/25 

MT SCENARIO is down within wave “C” 

-21.4 47.0 

After the 5 waves down move (major wave 

“A”?) which reached an 8.2 low, it developed 

a correction (major wave “B”) which ended 

below key 56.2 (ST 61.8%) on ST 50% (47.0). 

Main risk now is to be within the main falling 

wave “C” with 8.2 (wave “A” low) already 

reached, next targets being then 0.0 (LT 

50%) & key -21.4 (LT 61.8%). ST bearish 

confirmation came from a break below key 

17.5 low to develop the falling wave “3” of “C”. 

ALTERNATIVE SCENARIO..ST rise resumes 

It will fail to break below 8.2 low & perhaps 

started now a ST technical rebound by 

breaking daily ST falling wedge. It could 

trigger a wider correction towards 22.9 

(38.2%) initially 

STRATEGY 

Short covered position on 10. Wait for 

rebound now to re-sell. One can play current 

daily wedge breakout for 23 area 

Christian Sené 24 March 2011 


55 


Germany 10y: A break below key 3.06/11 is needed to turn down again MT Trend: Up/toppish Range: 3.11/3.30 

MT SCENARIO is still up 

The negative break above the LT falling 

wedge has allowed developing a rising move 

beyond key 3.11 (MT 61.8%) towards 3.39 

(LT 50%) initially and then key 3.70 (LT 

61.8%). Needs a break now above 3.335 (2- 

top area) to rekindle rising scenario 

ALTERNATIVE SCENARIO...ST correction 

Wave “5” of last 5 wave’s up move perhaps 

ended on 3.34 area and a ST correction is 

now developing after break seen below ST 

rising channel. Pullback done on its support & 

on 61.8% (3.23) area but stalling there now 

could allow renewed down move below key 

3.11 (MT up 61.8%) for 3.03 (ST 61.8%) 

STRATEGY 

Long on 3.29 sold 3.15. Buy again 3.25 S/L 

now at 3.30 for 3.05/15 

2.86/2.89 3.39 => 3.70 

UK 10y: Positive break below MT rising wedge & 61.8% for 3.40 target MT Trend: Up/toppish Range: 3.45/3.62 

MT SCENARIO remains up 

It took the way up from the LT falling wedge 

support. It needs now to overcome decisively 

critical 3.68/3.73 (LT falling wedge res & MT 

61.8%) to extend the MT bearish bias towards 

3.94 last top first & 4.30 (2010 top). Trend 

indicator (DMI) still slightly sustain up bias but 

is still narrowing while MACD crossed down 

ALTERNATIVE SCENARIO… ST correction? 

It failed to sustain slight break above key 

3.68/3.73 to develop now a ST correction 

after the breaks seen below ST rising wedge 

& below 3.60 (61.8%). Fall is still developing 

within a ST falling channel (3.35/3.59) towards 

3.40 target area initially 

STRATEGY 

Long on 3.58 break stopped at cost. Keep 

long below 3.59 if you are for 3.40 

3.25 3.94 => 4.30 

S&P: Still up within LT rising channel but negative ST rising wedge break MT Trend: Toppish Range: 1250/1315 

MT SCENARIO is still up 

The rise above the critical 1220/28 (April top & 

LT 61.8%) strengthened the latest MT bullish 

bias towards 1460 (LT rising channel res) & 

then 1576 (2007 top). It remains up oriented 

within LT rising channel (1184/1460).but tone 

has been weakened with break seen below 

ST rising wedge 

1138

Trade Reviews 

Options, Money Market and Bond Trades – Tactical & Strategic Trades 

This page summarises our main tactical (T) and strategic (S) trades. The former focus on short-term horizons (a few weeks), 

allowing one to play any near-term corrections within a defined trend, while the latter rely on a medium-term assumed trend. 

For each trade we provide the expected target and the recommended stop loss. 

Closed Strategies 

BTP Flattener Long BTP 5% Sep40 Short BTP 4% Sep20 

Position closed (14/03). PnL: -125k (incl. 3bp cost of carry). 

Current Strategies 

Yield Curves 

USD Swap Fly Pay USD 1/2/3s 

1s2s3s swap fly is currently around -11 bps and the recent lows have been 

around -12 bps as compared to the recent highs of around -4 bps. Although this fly 

is directional with 2y swap, it has recently dropped more than what is suggested by 

the 2y rate. 

EUR Butterfly Receive EUR 2/5/10s M1 IMM 

Proxy for 2/10s flatteners with positive carry. 

Cross Markets 

Schatz Spread Buy DUM1 TED 

Protection vs high vol scenario. 

USD Agency Callable Long FNMA 5nc6M 2.60 Jan16 Short T 0.75 Aug13 

Short-vol bullish strategies in the short end are attractive given the Fed status. 

Callables outperform in a range-bound environment, but currently tolerate a larger 

rise in rates (+115 bps) than a rally (-20 bps) before breaking even over a 6m 

horizon. 

Current* Targets Stop Entry 

. 

(S) 

-9.5 

(T) 

12.5 

(T) 

42.5 

(T) 

0k 

(S) 

70.0 96.0 85.5 

(13-Jan) 

-5.0 -13.0 -11.25 

(11-Mar) 

0.0 17.5 11.5 

(05-Jan) 

55.0 35.0 42.5 

(07-Mar) 

300k -150k 0k 

(06-Jan) 

Money Markets 

Eurodollar Fly Buy Eurodollar Z1M2Z2 

-16.0 

Fly is at 2y lows and offers good risk/reward for those looking for a rebound in front (T) 

end rates over the next few weeks. Also note that the fly has dramatically diverged 

from the EUR and UK flies. 

Eurodollar/Euribor Fly Buy ED U1H2U2 Sell ER U1H2U2 

-36.0 

RV position exploiting extreme valuation in both butterflies. 

(S) 

*Tactical (T) and strategic (S) trades. **Risk: vega, gamma for options, or ΔDV01 for futures, bonds and swaps. 

10.0 -30.0 -12.5 

(09-Mar) 

-15.0 -50.0 -40.0 

(09-Mar) 

Carry 

/ mth 

Risk** 

P/L 

(ccy/Bp) 

-1.5bp 10k/01 EUR - 

125k 

-12.5bp 

-3.0 10k/01 USD 

+17.5 

+1.75bp 

+1.0bp 10k/01 EUR -10k 

-1bp 

15k/01 EUR 0k 

0bp 

1k/01 USD 

0k 

5k/01 USD - 

17.5k 

-3.5bp 

8.75k/01 EUR +35k 

+4bp 

Interest Rate Strategy 24 March 2011 


57 


JPY Liquidity Boosts Global Assets 

• JPY printing and JPY weakening 

intervention suggest that JPY liquidity will go 

outside Japan in the quest for yield. 

• The BoJ and its G7 partners have drawn a 

line in the sand that points to USDJPY levels 

below 80.00 not being tolerated for long. 

• JPY-supportive repatriation fears are 

overblown. Japan’s foreign asset holdings are 

substantial, but holdings in relatively liquid 

assets such as bonds have largely been 

currency hedged. 

• The commodity rally should last for longer 

than we originally thought, stoked by JPY 

liquidity and additional demand on the back of 

Japan’s reconstruction needs. 

• Local markets’ currency reserves are 

rising, supported by the inflow of hot money. 

Reallocation needs will keep the USD weak. 

• We like the EUR, CAD, NOK, AUD and NZD 

and sell the CHF, USD and JPY. 

Japan shock has not helped the USD 

Japan will not cause the deflationary shock to the 

global economy that had initially been feared as a 

result of the earthquake, tsunami and nuclear power 

issues. When such extraordinary developments 

occur, investors scale back positions as they seek 

cover in liquid assets. But, once again, money being 

pulled out of local markets and high-yield currencies 

did not support the USD. Indeed, the USD has 

remained on its downtrend against all other G10 

currencies. At first glance, the USD’s inability to rally 

must surprise. Local-market and high-yielding 

investments had been USD funded and one would 

have assumed that the liquidation of USD-funded 

positions would have led to USD inflows. The 

explanation for this unusual USD behaviour is that 

Asian central banks have continued reallocating their 

currency reserves, creating USD supply that has 

benefited the EUR the most. 

The USD’s fortune remain in the hands of 

currency-reserve managers 

For now, central-bank currency-reserve managers 

will continue offering USD as currency-reserve 

growth is still running at record pace (Chart1). It is 

being pushed up by hot money flooding into Asia in 

anticipation of currency appreciation (Chart 2). The 

incoming reserves are USD denominated and 

decreasing the weight of USDs in global currency 

billions 

Chart 1: China’s Currency Reserves Shot Up 

USD 400bn in Six Months (USD bn) 

Source: Reuters Ecowin Pro 

billions 

400 

350 

300 

250 

200 

150 

100 

50 

0 

Chart 2: China’s Currency Reserves 

Increasingly Driven by Hot Money Flows (USD 

bn) 

800 

700 

600 

500 

400 

300 

200 

100 

0 

-100 

03 04 05 06 07 08 09 10 

FDI 

hot money 

trade 

00 01 02 03 04 05 06 07 08 09 10 


reserves has become a common theme. However, it 

is not only the re-allocation of incoming currency 

reserves that is driving reserve managers out of the 

USD. 

Many local economies are overheating, developing 

capacity constraints. Domestic inflation pressures are 

rising and the last thing now needed is higher 

commodity prices pushing import prices up. Hence, 

Asian central banks will have to allow domestic 

currencies to rise against the USD. The intensifying 

commodity rally will increase this pressure. Rising 

Asian currency appreciation expectations will bring 

even more hot money into the region, forcing central 

banks to attempt to control the pace of the 

appreciation of local currencies by absorbing some of 

the incoming USDs – pushing currency reserves up 

Hans-Guenter Redeker 24 March 2011 


58 


again, boosting global liquidity. This in turn will push 

commodity prices even higher. 

This pattern will only come to an end when Asian 

currencies are viewed by markets as fairly valued. 

Taking the size of Asian current account surpluses 

as a guide, Asian currencies will have to rise 

substantially before investors stop placing hot money 

bets on Asia and other local markets. 

Central banks’ different reaction functions 

Commodity prices affect headline inflation rates, to 

which central banks have different reaction functions. 

The most extreme reaction functions within the G10 

can be seen at the ECB and Fed. The ECB is ready 

to increase rates on the 7 April, using headline 

inflation and spill-over risks as the justification. 

However, the Fed is set to stay put, arguing that 

headline inflation pressure will be transitory. It 

regards short-term inflation pressure as outweighed 

by the reduced real income associated with rising 

commodity prices. EURUSD will stay bid for now due 

to relative rate expectations 

Taking a look at commodity prices 

Commodity prices are driven by cyclical, structural 

and liquidity factors, which currently all point to the 

upside. While we will not dig too deeply into 

commodity markets here, we refer to an IMF study 

(Rising Prices on the Menu, 

http://www.imf.org/external/pubs/ft/fandd/2011/03/hel 

bling.htm#4), released last week. This concluded that 

food inflation is not only cyclical and weather related, 

but that structural factors are also pushing prices up. 

Such factors include increasing demand on the back 

of rising global income levels and declining 

CNY (thousand billions) 

Chart 3: PBoC Slow to Absorb Inflowing 

Liquidity 

20.0 

17.5 

15.0 

12.5 

10.0 

7.5 

5.0 

2.5 

0.0 

-2.5 

-5.0 

00 01 02 03 04 05 06 07 08 09 10 


productivity in the agricultural sector. The IMF writes: 

“Over the past decade, global productivity growth – 

as measured by the amount of crop produced per 

hectare – has fallen for rice and wheat compared 

with the 1980s and 1990s and has been broadly 

stagnant for corn and soybeans. Less productivity 

growth means higher prices, everything else being 

equal”. These findings define a new stance by the 

IMF, which previously argued that soft commodity 

prices were mainly driven by cyclical factors. We 

note that generally improved technology and 

knowledge have not prevented productivity growth 

from being low and subsequently food prices high. 

Rising prices for food and other commodities could 

have far-reaching consequences for global 

economies, global liquidity and currency markets. 

Commodities and FX 

PBoC Bonds Issued 

FX Reserves (Liquidity) 

Graphic 1: Food Price Contribution to Inflation 




59 


Graphic 2: Fuel Price Contribution to Inflations 

The experience of the past two decades has been 

that risks of a pass-through from rising food prices to 

core inflation are low for advanced economies, but 

significant for emerging economies. The graphics 

shown above have been taken from an IMF study 

released in October 2008: ‘Is inflation back? 

Commodity prices and inflation’ 

(http://www.imf.org/external/pubs/ft/weo/2008/02/pdf/ 

c3.pdf). It illustrates the first-round effects of higher 

food and fuel prices on various economies. 

Asian economies are the most affected by rising food 

prices, but Asia is also the region where capacity 

constraints due to overheating economies are most 

visible. Fuel prices seem to be less of an issue for 

Asia, but this is due to subsidies protecting 

consumers at the expense of state budgets. The 

correlation between fuel prices and energy costs has 

steadily increased due to ethanol being used as a 

substitute for oil. Hence, rising fuel prices will add to 

the structural forces driving food prices higher. 

Chart 4 shows China’s wages relative to GDP 

breaking sharply higher, indicating that China’s core 

inflation will move higher too. The last thing China 

and other Asian countries need is domestic price 

pressures to be amplified by rising import prices. 

Since commodities are priced in USDs, there is 

therefore a need to allow domestic currencies to 

appreciate against the USD. 

However, emerging-market authorities are known for 

their cautious approach – i.e. they will not be willing 

to exacerbate the risks to growth posed by the 

difficulties in the world’s third-largest economy. 

Hence, the pace of the appreciation of Asian 

currencies will remain controlled by central banks. 

This could lead to a situation where rising commodity 

prices boost currency appreciation expectations, 

steering additional short-term funds into the region. 

This in turn would leave central banks with little 

choice but to absorb this incoming liquidity, adding to 

their currency reserves. Investing these reserves in 

Western liquid assets would increase global liquidity, 

boosting commodity prices and pushing funds 

around the globe in circles. 

BoJ opens monetary flood gates 

Meanwhile, the BoJ has left little doubt that it is ready 

to pump additional funds into its money markets if 

required. The additional JPY liquidity will not stay at 

home and coordinated G7 intervention to weaken the 

yen indicates that JPY strength will not be tolerated 

at a time when rebuilding the country is top of the 

agenda. Hence, motivated by central-bank 

intervention, JPY liquidity may have to seek a home 

outside Japan – boosting risky assets globally, 

including commodities. Indeed, it could be argued 

that Japan’s disaster may only have very limited 

domestic short-term deflationary effects, but massive 

global long-term inflationary implications. 

The nuclear exit will boost prices for alternative 

energies 

Nuclear power has been discredited. Even if nuclear 

power is still used, the costs of running nuclear 

power plants will inevitably rise. Germany has taken 

seven of its oldest plants out of action and the 

Energy Ministry has released a plan to increase 

safety standards at the remaining nuclear plants. The 

cost of raising such standards will effectively price 

out nuclear energy. Fossil and green technologies 



60 


will be used instead. No wonder that carbon 

emissions, natural gas and coal prices have shot up 

in light of Japan’s nuclear accident. 

The combination of easier monetary conditions and 

rising commodity prices may remind investors of 

what happened in the early 1970s. Then, central 

banks focused on the negative income effect of rising 

commodity prices and less on inflation. Inflation 

became an issue, first leading to equity and 

commodity price rallies as investors looked for ‘real’ 

exposure. However, by the end of the decade, all 

asset classes were in retreat. Taking some guidance 

from the 1970s investment cycle might not be a bad 

idea now. 

Chart 4: China’s Wages relative to GDP 

0.280 

0.275 

0.270 

0.265 

0.260 

0.255 

0.250 

0.245 

96 98 00 02 04 06 08 10 

Source: Reuters EcoWin 

AUD remain bid for now 

Strong global liquidity conditions, rising commodity 

prices and a general attitude of investors taking risk 

on will keep the AUD supported. Before Japan’s 

disaster, we were convinced that rising inflation rates 

would eventually lead to growth-reducing tightening 

of monetary conditions in Asia and other local 

economies – which would have worked against the 

AUD. Now, with Japan’s short-term supply chain 

problems cooling economic conditions in its trading 

partners, this fear has been removed for now from 

investors’ minds. Once again, the AUD looks 

attractive with its nominal yield differential working as 

a magnet for international capital. 

Inflation will work against the JPY and the CHF 

Previous research pieces analysed the impact of 

rising global inflation rates on fx markets. Rising 

inflation rates will push bond yields up and the higher 

yields will increase the opportunity cost of holding 

non-yielding assets. Cash is a low-yielding asset and 

the CHF and the JPY are currency cash trades. 

Inflation rates will start to rise in most G10 countries 

from very moderate levels, initially working in favour 

of equity markets and keeping the pro-risk trade alive 

for now. JPY crosses should benefit. 

What about Japan’s repatriation threat? 

Japan’s USD 3trn net foreign asset position has fed 

speculation that Japan will see a wave of funds being 

repatriated to help fund rebuilding costs. We think 

that those fears, which suggest a higher JPY, have 

been overblown. Sure, cleaning up the rubble and 

rebuilding Japan’s production capacity, housing and 

infrastructure will be expensive. And with national 

savings falling sharply, capital from abroad will have 

to come in – closing the gap between domestic 

capital demand and supply. However, Japan’s bond 

yields will not be high enough to entice private 

accounts to move foreign asset holdings back home. 

Chart 5: Japan’s 5-year JGB versus 5-year CDS 

(bps) 

Source: Reuters Eco Win 

Repatriation flows depend on yield differentials 

Out of the USD 3trn total foreign asset holdings, 

about USD2trn are held by private accounts including 

investment trusts. A decline in bond spreads could 

convince these accounts to reduce foreign holdings 

in favour of domestic investments. In the past, we 

have seen the JPY appreciate at times when bond 

yield differentials had been falling. Last week’s 

decline in nominal yield spreads also saw JPY 

strength. 

However, this time it has been Japan’s increasing 

CDS spreads keeping nominal bond yields up, while 

global yields have been coming down. Japan’s risk 

premium was the main contributor to the declining 

yield differential – hardly a convincing reason for 

Japan’s private investors to repatriate funds. 

Japan cannot afford higher bond yields 

Japan’s declining domestic savings in conjunction 

with increasing capital demand related to Japan’s 

rebuilding efforts should push local bond yields up 

and steepen the JGB yield curve. However, rising 



61 


ond yields increase sovereign funding costs – 

adding to already-elevated deficit and debt levels. 

Attracting foreign capital via rising yields is not an 

option, but with JGB bond yields low, private 

accounts will have little incentive to move funds back 

to Japan. We think Japan will have to under-price its 

currency, taking it to a low valuation level with the 

help of very easy monetary conditions, to attract 

foreign funds. However, should JGB yields rise, 

investors would price in higher solvency risks – 

pushing CDS spreads wider. 

As Japan cannot afford higher bond yields without 

undermining its fiscal position further, it has two 

options: 

• It can increase private savings (higher 

taxation) to fund its rebuilding efforts; or 

• It can introduce super-easy monetary 

conditions, including moderate monetisation of its 

sovereign debt and devaluation of the JPY. 

The second choice is less costly and more likely. 

Nonetheless, should Japan use option one and 

increase taxes, JGB bond yields will remain low and 

Japan’s deflationary equilibrium will continue for 

longer. In this case, foreign interest rates and yield 

trends will determine the fate of the JPY. 

Both our scenarios suggest the BoJ will keep rates 

near zero for a long time. Outside Japan, our base 

scenario sees the Fed as the last G10 central bank 

to begin raising rates. However, by next year, rate 

hike trends should be generally in place – weakening 

the JPY from a cyclical perspective, even against the 

USD. 

Our trading strategy 

What will Japan’s disaster mean for currencies 

outside the JPY spectrum? If our working assumption 

of rising commodity prices stoked by JPY liquidity 

and higher demand related to Japan’s rebuilding 

work is correct, EURUSD has further upside 

potential. 

Summer 2008 provides proof that the ECB keeps on 

fighting inflation even when growth risks are on the 

rise – keeping the odds high for a rate hike on 7 

April. Commodity and high-yielding currencies will 

remain supported as liquidity conditions receive 

another boost from i) the BoJ opening the monetary 

floodgates and ii) central banks’ allocation of 

currency reserves. The CHF, USD and the JPY will 

suffer. 



62 


Dollar Decline Should Continue 

• The dollar remains on the defensive versus most key currencies, tumbling to new cycle lows this 

week versus EUR and GBP 

• The dollar finds temporary support in the form of strong EUR/USD resistance at 1.4280, GBP/USD 

resistance at 1.6460, AUD/USD resistance at 1.0255, and US Dollar Index support at 75.00… 

• …but the medium-term outlook calls for further dollar weakness 

• EUR/USD has medium-term scope to 1.4335-1.4450-1.4580, GBP/USD to 1.65-1.6665 and AUD/USD 

to 1.0325-1.05 aided by our bullish medium-term forecasts for the S&P 500 Index, gold and copper 

• The USD/JPY V-bottom off 76.25 suggests current consolidation (80.50-81.30) will be followed by a 

rise towards 82.00-83.00/30 medium-term resistance 

The dollar remains under pressure versus most key 

currencies this week with the US Dollar Index (DXY) 

falling to a 4-month low, EUR/USD rising to a 4-month 

high and GBP/USD hitting to a 14-month high. The 

current bout of dollar weakness is being lead by the 

commodity currencies and spearheaded by 

AUD/USD, which is enjoying its sharpest upswing of 

the year. However, the dollar has found support as 

these markets test key levels: the EUR/USD rise is 

currently capped by strong resistance from the 1.4280 

November high, with the GBP/USD rally capped by 

1.6460 resistance from the Jan’10 high, and the 

AUD/USD advance facing stiff resistance from its 

historic 1.0255 December historic. On the flip side, 

the DXY tests strong 75.00/20 support. 

Following sharp reversals in equity markets and key 

commodities during February-March, we suspect 

“risk-on” trading has returned. Our medium-term 

forecast calls for new cycle highs in the S&P 500 

Index plus new record highs for gold and copper. This 

should have bullish implications for the commodity 

currencies, EUR/USD and GBP/USD. The 95-pt 

decline in the S&P 500 Index during Feb-March is 

similar to the 89-pt August correction. If history 

repeats itself – and we think it will – the current 

rebound will extend as the S&P 500 sets a new cycle 

high in the months ahead: we target the 1350-1361- 

1376 zone heading into May, with deference to the 

“Sell in May and go away” Wall Street adage. After its 

sharp 12% Feb-March decline, COMEX copper is 

swiftly rebounding; we see scope towards 475-500 

over the next several weeks. Silver has set a fresh 

31-year high this week and next targets $38.62-40.00. 

We expect spot gold to post a new historic high, with 

medium-term scope towards $1460-1500/30. 

Pattern analysis suggests dollar support will be 

temporary, followed by resumption of the entrenched 

dollar downtrend. This implies EUR/USD will 

eventually extend above 1.4280 towards its 

1.4335/75-1.4450-1.4580 medium-term target zone, 

as the DXY declines towards 74.00-73.25. With 

strong bullish weekly momentum, the AUD/USD rally 

targets new all-time highs between 1.0325-1.05 over 

the medium-term. Given its weaker momentum, 

GBP/USD is expected to lag the EUR/USD advance, 

but should still extend towards 1.6500-1.6665-1.6720. 

Chart 1: EUR/USD — Temporary pullback ahead of 1.4280 resistance 

The recent EUR/USD 

rise has temporarily 

stalled just below strong 

1.4280 resistance from 

the November high. This 

is typical price action as 

stiff resistance often 

holds on initial test. 

Favor short-term 

consolidation followed by 

a breakout above 1.4280 

toward 1.4335/75- 

1.4450-1.4580 over the 

next several weeks. 

1.43 

1.39 

1.35 

1.31 

1.27 

1.23 

1.19 

1.2150 

1.3335 

02-Aug-10 

1.2640 

Last week’s USD/JPY collapse and subsequent sharp 

rebound (fuelled by G7 intervention) created a V- 

bottom off the 76.25 spike low. Current 80.50-81.30 

consolidation is expected to be followed by a further 

rise testing strong 82.00/30-83.00/10/30 resistance. 

29-Sep-10 

26-Nov-10 

25-Jan-11 24-Mar-11 

Source BNP Paribas 

Andrew Chaveriat 24 March 2011 


63 

www.GlobalMarkets.bnpparibas.com 

1.4280 

1.3860 

1.2875 

1.3505

Last week’s collapse to 

76.25 and rapid G7 

intervention-led rebound 

to 82.00 created a V- 

bottom. This bullish 

pattern suggests current 

80.50-81.30 sideways 

consolidation will be 

followed by a further rise 

testing strong mediumterm 

resistance between 

82.00/30-83.00/10/30. 

Daily and weekly 

momentum are bullish 

aiding USD/JPY upside 

potential. 

88 

86 

84 

82 

80 

78 

76 

02-Aug-10 

Chart 2: USD/JPY — V-bottom off 76.25 

85.95 

82.85 

29-Sep-10 

80.20 

84.50 

26-Nov-10 

80.90 

Chart 3: GBP/USD — Pullback off 1.6400/60 resistance 

25-Jan-11 

84.00 

76.25 

24-Mar 


GBP/USD rallied to a 14- 

month high this week 

1.65 

1.6300 

1.6400 

before stalling at the 

1.6400 round-number 1.61 

1.6200 

barrier just below 1.6460 

1.5980 

long-term resistance from 1.57 

the January’10 high. 

1.5525 

1.5485 

1.53 

The medium-term pattern 

1.5295 

1.5345 

is bullish implying 1.6460 

1.49 

will eventually be broken 

opening a test of the 

broad H2 2009 rounded 1.45 

congestion zone starting 

at 1.6665-1.6720. 1.41 

1.4230 

06-Apr-10 03-Jun-10 02-Aug-10 29-Sep-10 26-Nov-10 25-Jan-11 24-Mar-11 


Chart 4: AUD/USD — Medium-term scope to new all-time highs 

As we’ve seen many 

times before, AUD/USD 

is leading the USD selloff 

as Commodity 

Currencies get a boost 

from the revival of “riskon”. 

The breakout above the 

1.0200 Feb/March local 

double-top now targets 

the historic 1.0255 

December high with a 

break of that level 

opening medium-term 

scope to 1.0325-1.05. 

1.02 

0.98 

0.94 

0.90 

0.86 

0.82 

0.8315 

0.9220 

02-Aug-10 

0.8770 

29-Sep-10 

1.0180 1.0255 

0.9535 

26-Nov-10 

25-Jan-11 

0.9705 

1.0200 

24-Mar-11 


Andrew Chaveriat 24 March 2011 


64 


Currency Spot Trade Recommendations Date 

AUDCHF 0.9255 Buy 0.9155, stop 0.9055, target 0.9650 24 Mar 2011 

EURUSD 1.4190 Buy 1.4010, stop 1.3910, target 1.4350 18 Mar 2011 

AUDNZD 1.3610 Sell 1.3820, stop 1.3920, target 1.32 17 Mar 2011 

EURGBP 0.8785 Long at 0.8530, raise stop to 0.8650, raise target to 0.8810 24 Feb 2011 

USDKZT 146.70 Short at 147.00, stop at 149.50, target 135.00 28 May 2010 

AUDMXN 12.210 Shorts from 12.230 stopped at 12.010 7 Mar 2011 

AUDCAD 0.9965 Shorts from 0.9830 stopped at 0.9800 4 Mar 2011 

Source : BNP Paribas 

Ian Stannard 24 March 2011 


65 


Economic Calendar: 25 March - 1 April 

GMT Local Previous Forecast Consensus 

Fri 25/03 23:30 08:30 Japan CPI National y/y : Feb 0.0% 0.0% 0.0% 

23:30 08:30 Core CPI National y/y : Feb -0.2% -0.3% -0.3% 

23:30 08:30 CPI Tokyo y/y : Mar -0.1% 0.0% -0.1% 

23:30 08:30 Core CPI Tokyo y/y : Mar -0.4% -0.3% -0.3% 

(24/03) 

06:30 07:30 France GDP (Final) q/q : Q4 0.3% (p) 0.3% 0.3% 

06:30 07:30 GDP (Final) y/y : Q4 1.5% (p) 1.5% 1.5% 

07:45 08:45 Consumer Confidence : Mar 85 85 n/a 

07:00 08:00 Germany Import Prices m/m : Feb 1.5% 1.0% 0.9% 

07:00 08:00 Import Prices y/y : Feb 11.8% 11.7% 11.6% 

09:00 10:00 Ifo Business Climate : Mar 111.2 109.5 110.5 

09:00 10:00 Ifo Current Conditions : Mar 114.7 114.2 114.6 

09:00 10:00 Ifo Expectations : Mar 107.9 104.9 106.8 

08:00 09:00 Spain PPI m/m : Feb 2.4% 0.5% 0.9% 

08:00 09:00 PPI y/y : Feb 6.8% 7.1% 7.5% 

08:30 09:30 Neths Producer Confidence : Mar 1.7 2.0 1.8 

09:00 10:00 Italy Retail Sales y/y : Jan 0.4% 1.2% 0.7% 

09:00 10:00 Eurozone M3 y/y : Feb 1.5% 2.0% 1.7% 

09:00 10:00 M3 3m y/y : Feb 1.7% 1.7% 1.6% 

20:15 21:15 ECB’s Gonzalez-Paramo Speaks at Annual Meeting on Spanish Events in Washington 

11:30 07:30 US Fed’s Fisher Speaks at Bruegel Research Institute in Brussels 

12:30 08:30 GDP (Final, saar) q/q : Q4 2.8% (p) 2.8% 3.0% 

12:30 08:30 GDP Deflator (Final, saar) q/q : Q4 0.4% (p) 0.4% 0.4% 

12:30 08:30 Corporate Profits q/q : Q4 6.6% 3.2% n/a 

12:30 08:30 Fed’s Evans Briefs Reports at a Chicago Fed Breakfast 

13:15 09:15 Fed’s Lockhart Speaks on Economy in Florida 

13:55 09:55 Michigan Sentiment (Final) : Mar 68.2 (p) 66.6 68.0 

16:15 12:15 Fed’s Plosser Speaks on Monetary Policy in New York 

17:00 13:00 Fed’s Fisher Speaks in Brussels at Forum 

EU EU Leaders Hold Summit in Brussels 

Sun 27/03 02:00 03:00 Europe Clocks Go Forward One Hour 

Mon 28/03 07:30 09:30 Sweden Retail Sales (sa) m/m : Feb -0.1% 0.4% n/a 

07:30 09:30 Retail Sales (nsa) y/y : Feb 2.8% 4.4% n/a 

12:30 08:30 US Personal Income m/m : Feb 1.0% 0.2% 0.4% 

12:30 08:30 Personal Spending m/m : Feb 0.2% 0.7% 0.5% 

14:00 10:00 Pending Home Sales : Feb 

16:40 12:40 Fed’s Lockhart to Speak on US Economy in Atlanta 

19:40 15:40 Fed’s Evans Speaks to Reporters in South Carolina 

22:00 18:40 Fed’s Rosengren Speaks in Boston 

Tue 29/03 23:30 08:30 Japan Household Consumption y/y : Feb -1.0% 0.2% -0.3% 

23:30 08:30 Unemployment Rate (sa) : Feb 4.9% 4.9% 4.9% 

23:50 08:50 Retail Sales y/y : Feb 0.1% -0.5% -0.5% 

(28/03) 

06:00 08:00 Germany GfK Consumer Confidence : Apr 6.0 5.7 5.8 

States’ Cost of Living m/m : Mar 0.5% 0.5% 0.5% 

States’ Cost of Living y/y : Mar 2.1% 2.2% 2.2% 

HICP (Prel) m/m : Mar 0.6% 0.6% 0.4% 

HICP (Prel) y/y : Mar 2.2% 2.3% 2.1% 

06:45 08:45 France Housing Starts (3-mths) y/y : Feb 26.1% 34.0% n/a 

06:45 08:45 Household Consumption m/m : Feb -0.4% 0.9% n/a 

06:45 08:45 Household Consumption y/y : Feb 2.4% 5.0% n/a 

08:00 10:00 Italy ISAE Business Confidence Survey : Mar 103.0 102.5 102.5 

08:30 09:30 UK GDP (Final) q/q : Q4 -0.6% (p) -0.6% -0.6% 

08:30 09:30 GDP (Final) y/y : Q4 1.5% (p) 1.5% 1.5% 

08:30 09:30 Net Consumer Credit : Feb GBP-0.3bn GBP0.0bn n/a 

08:30 09:30 Mortgage Approvals : Feb 45.7k 46.0k 46.5k 

10:00 06:00 US Fed’s Bullard Speaks on Monetary Policy in Prague 

13:00 09:00 S&P/Case-Shiller Home Price Index : Jan 

Market Economics 24 March 2011 

Market Mover 

66 



14:00 10:00 Consumer Confidence : Mar 70.4 55.0 65.4 

14:00 16:00 Eurozone ECB’s Mersch Speaks at Luxembourg Conference 

Wed 30/03 23:50 08:50 Japan Industrial Production (Prel, sa) m/m : Feb 1.3% 0.7% -0.1% 

(29/03) 

07:00 09:00 Spain Retail Sales (Adjusted) y/y : Feb 

07:00 09:00 HICP Flash y/y : Mar 3.4% 3.5% n/a 

08:00 10:00 Italy Wages m/m : Feb 0.1% 0.6% n/a 

08:00 10:00 Wages y/y : Feb 1.7% 1.9% n/a 

08:10 10:10 Eurozone Retail PMI : Mar 49.9 52.5 n/a 

09:00 10:00 Economic Sentiment : Mar 107.8 107.3 107.5 

09:00 10:00 Consumer Sentiment : Mar -10.0 -10.6 -10.6 

09:00 10:00 Industry Sentiment : Mar 6.5 5.5 6.0 

11:30 13:30 Bank of Portugal Governor Speaks at Luncheon in Lisbon 

European Commission Issues Quarterly Report on the Euro Area 

09:15 11:15 Belgium CPI m/m : Mar 0.6% 0.4% n/a 

09:15 11:15 CPI y/y : Mar 3.4% 3.4% n/a 

09:30 11:30 Switzerland KOF Leading Indicator : Mar 

10:00 11:00 UK CBI Distributive Trades Survey : Mar 

11:30 07:30 US Challenger Layoffs : Mar 

12:15 08:15 ADP Labour Change : Mar 217k 200k 210k 

14:30 10:30 EIA Oil Inventories 

17:00 13:00 Fed’s Bullard Speaks at UBS Dinner in London 

18:30 14:30 Fed’s Hoenig Speaks at London School of Economics 

Thu 31/03 23:01 00:01 UK GfK Consumer Survey : Mar -28 -32 -29 

(30/03) 

06:00 07:00 Nationwide House Prices Index m/m : Mar 0.3% -0.3% -0.2% 

06:00 07:00 Nationwide House Prices Index y/y : Mar -0.1% -0.9% -0.8% 

08:30 09:30 BoE Credit Conditions Survey : Q1 

23:00 01:00 Eurozone Irish Central Bank Releases Banking Stress Test Results 

(30/03) 

07:30 09:30 Eurocoin : Mar 0.57 0.65 n/a 

09:00 11:00 HICP (Flash) y/y : Mar 2.4% 2.5% 2.3% 

00:30 11:30 Australia Retail Sales m/m : Feb 0.4% 0.6% n/a 

00:30 11:30 Retail Sales y/y : Feb 1.8% 3.6% n/a 

05:00 14:00 Japan Housing Starts y/y : Feb 2.7% 27.4% 6.5% 

06:45 08:45 France PPI m/m : Feb 0.9% 0.3% n/a 

06:45 08:45 PPI y/y : Feb 5.6% 5.7% n/a 

07:55 09:55 Germany Unemployment (Chg, sa) : Mar -52k -25k -24k 

07:55 09:55 Unemployment Rate : Mar 7.3% 7.2% 7.2% 

08:00 10:00 Italy PPI m/m : Feb 1.1% 0.7% n/a 

08:00 10:00 PPI y/y : Feb 5.2% 5.5% n/a 

09:00 11:00 CPI (NIC, Prel) m/m : Mar 0.3% 0.3% n/a 

09:00 11:00 CPI (NIC, Prel) y/y : Mar 2.4% 2.4% n/a 

09:00 11:00 HICP (Prel) m/m : Mar 0.2% 1.7% n/a 

09:00 11:00 HICP (Prel) y/y : Mar 2.1% 2.3% n/a 

08:00 10:00 Norway Retail Sales (sa) m/m : Feb 0.1% 1.1% n/a 

08:00 10:00 Retail Sales (nsa) y/y : Feb 0.4% 1.0% n/a 

12:30 08:30 Canada GDP m/m : Jan 

12:30 08:30 US Initial Claims 382k 385k n/a 

13:45 09:45 Chicago PMI : Mar 71.2 69.0 70.0 

14:00 10:00 Factory Orders m/m : Feb 3.1% 0.5% 1.3% 

14:30 10:30 Fed’s Lacker to Speak at 2011 Credit Symposium in Charlotte 

16:30 12:30 Fed’s Tarullo to Speak at 2011 Credit Symposium in Charlotte 

Fri 01/04 23:50 08:50 Japan Tankan (Large Manufacturers DI) : Q1 5 2 6 

(31/03) 

07:00 09:00 Norway Unemployment Rate (sa) : Mar 3.0% 3.0% n/a 

08:00 10:00 Italy Unemployment Rate : Q4 8.3% 8.4% n/a 

08:00 10:00 Eurozone PMI Manufacturing (Final) : Mar 57.7 (p) 57.7 57.7 

09:00 11:00 Unemployment Rate : Feb 9.9% 9.8% 9.9% 

08:30 09:30 UK CIPS Manufacturing : Mar 61.5 60.5 61.0 


Market Mover 

67 



12:15 08:15 US Fed’s Plosser Speaks on the Economy in Harrisburg, Pennsylvania 

12:30 08:30 Non-Farm Payrolls (Chg) : Mar 192k 180k 194k 

12:30 08:30 Unemployment Rate : Mar 8.9% 9.0% 8.9% 

12:30 08:30 Average Hourly Earnings m/m : Mar 0.0% 0.1% 0.2% 

13:00 09:00 Fed’s Dudley Speaks in San Juan, Puerto Rico 

14:00 10:00 Construction Spending m/m : Feb -0.7% -1.0% 0.6% 

14:00 10:00 ISM Manufacturing : Mar 61.4 61.0 61.0 

During 30-31/3 Eurozone Weber, Rehn, Juncker, Schaeuble at Berlin Banking Congress 

Week 28/3-1/4 Germany Retail Sales (BBK, Real, sa) m/m : Feb 0.4% 0.6% 0.3% 

Retail Sales (BBK, Real, sa) y/y : Feb 2.6% 2.0% 1.7% 

Release dates and forecasts as at c.o.b. prior to the date of publication: See Daily Economic Spotlight for any revision 



Market Mover 

68 


Key Data Preview 

3 

2 

1 

0 

-1 

-2 

-3 


CPI excluding energy and 

food, but not alcohol 

Core CPI 

02 03 04 05 06 07 08 09 10 11 


% y/y Feb (f) Jan Dec Nov 

Core CPI -0.3 -0.2 -0.4 -0.5 

CPI 0.0 0.0 0.0 0.1 

Key Point: 

Thanks to the resurgent commodities market, the 

core CPI has recently improved more than expected. 

Although the index could deteriorate slightly in 

February, the trend remains one of improvement. 

The negative margin will continue to narrow, leading 

to a small rise in prices in April. 

BNP Paribas Forecast: Slightly Faster 

Rate of Decline 

Japan: CPI (National, February) 

Release Date: Friday 25 March 

In January, the rate of decline in the national core CPI 

eased 0.2pp from December to -0.2% y/y, as the index has 

improved faster than expected. 

Although the Tokyo CPI numbers for February suggest the 

national index could deteriorate slightly to -0.3% y/y in 

February, the trend remains one of improvements, thanks 

to resurgent commodities prices, led by oil, we expect the 

core CPI’s negative margin should narrow again in March 

followed by small positive price rise in April. 

The chronic weakness of domestic demand due to the rise 

in the average age of the aging population has prevented 

commodity prices to be passed down to the retail level. 

However, if the commodities market continues to rise 

corporate earnings could be squeezed enough that high 

costs gradual filter down to various goods and services, 

beginning with food. 

Food prices, which are moving sideways, should be closely 

monitored, as this item trailed only petroleum products as 

the price growth leader during the last commodities market 

boom (H2 2007-H1 2008). 

Chart 2: Eurozone M3 and Bank Lending (% y/y) 

12.5 

10.0 

7.5 

5.0 

2.5 

0.0 

Private Sector 

Bank Lending 

M3 

-2.5 

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 


% y/y Feb (f) Jan Dec Nov 

M3 2.0 1.5 1.7 2.1 

M3 (3-mth Avg.) 1.7 1.7 1.6 1.4 

Private Sector Loans 2.5 2.4 1.9 2.0 

Key Point: 

Rates of growth in M3 and bank lending are still low 

by past standards but are trending higher. 

BNP Paribas Forecast: Trending Upwards 

Eurozone: Monetary Developments (February) 


The headline year-on-year growth rate in M3 decelerated in 

both December and January. However, the three-month 

average rate of growth has continued to trend upwards. At 

1.7% as of January, it has risen by almost 2pp from its 

trough in May 2010. 

The year-on-year growth rate in private-sector bank lending 

is also on an upward trend. The rate of increase of 

2.4% y/y of January was over 3pp above its trough in 

October 2009 (of -0.8%). We look for a further, modest, 

pick-up in February’s data. 

Loans to households have been the main driver of the rise, 

with lending for mortgages particularly robust. The rate of 

growth in the latter accelerated from 3.7% y/y to 3.9% in 

January, its highest growth rate since autumn 2008, before 

the financial crisis intensified. 

In contrast, consumer credit has continued to contract on a 

year-on-year basis (-0.8% in January). 

Lending to the non-financial corporate sector is lagging that 

for households, as is typically the case. The rate of growth 

has turned positive, however, at 0.4% y/y in January, from 

a trough of -2.7% the year before. 


Market Mover 

69 



Chart 3: Germany Ifo Business Climate and 

Growth 

6 

5 

4 

3 

2 

1 

0 

-1 

-2 

-3 

-4 

-5 

-6 

Ifo Business Climate (RHS) 

GDP (% y/y) 

-7 

60 

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 


Mar (f) Feb Jan Dec 

Headline 109.5 111.2 110.3 109.8 

Expectations 104.9 107.9 107.8 106.8 

Current Conditions 114.2 114.7 112.8 112.9 

Key Point: 

Sentiment will remain positive but the recent news 

flow points to a drop in expectations. 

110 

105 

100 

95 

90 

85 

80 

75 

70 

65 

BNP Paribas Forecast: Correction 

Germany: Ifo Business Climate (March) 


Ifo’s business climate index improved for the ninth month in 

a row in February, rising to its strongest level for over four 

decades and indicating a further acceleration in growth 

from an already robust rate (see chart). 

The sub-indices measuring current business conditions 

and future expectations have both been improving over the 

past few months but we expect to see more divergence in 

the period ahead. 

The expectations sub-index is forecast to drop markedly in 

March given the flow of adverse news during the survey 

period. The ECB has been signalling a more hawkish 

policy stance and oil prices are higher in response to 

greater turbulence in the MENA region. More recently, 

events in Japan have added to uncertainty about the 

outlook. 

Falls in the expectations index in the first month after 

external shocks include 5-point falls in October 2008 (after 

the collapse of Lehman Brothers) and in September 2001 

(after the 9/11 terrorist attacks). We forecast a 3-point fall 

this month. 

The assessment of current business conditions in Germany 

should remain very positive, with recent orders data strong. 

Domestic conditions have also improved, leaving the 

economy less dependent on exports. 

Chart 4: French Hh Confidence vs. CPI (% y/y) 

-1.0 

-0.5 

0.0 

0.5 

1.0 

1.5 

2.0 

2.5 

3.0 

3.5 

4.0 

CPI Inflation Rate (% y/y, inverted) 

Household Confid. (RHS) 

02 03 04 05 06 07 08 09 10 


Diffusion Index, SA Mar (f) Feb Jan Mar 10 

INSEE indices: 

Overall 85 85 85 88 

Buying opportunity -22 -21 -23 -23 

EU Commis. Index: 

Headline -20.0 -20.1 -18.9 -19.0 

Key Point: 

Higher prices for energy are weighing on confidence 

and preventing any recovery from the present weak 

level. 

115 

110 

105 

100 

95 

90 

85 

80 

75 

BNP Paribas Forecast: Stable Again 

France: Household Confidence (March) 


The labour market has shown some signs of improvement 

recently, with fewer job seekers in January and a decline in 

the unemployment rate (which eased 0.1pp in Q4 

according to INSEE, and 0.1pp in January according to 

Eurostat). This improvement was confirmed by the upward 

revision of non-farm payrolls in Q4, now up 0.2% q/q and 

0.8% q/q. 

However, the impact of such good news is most probably 

compensated, if not outweighed, by further increases in 

energy prices. Gasoline in particular, reached an all-time 

high in the first week of March, before rising again the 

following week. This is putting more downward pressure on 

perceived purchasing power than the decline of core 

inflation (seen in the first two months of the year) is 

removing. 

It is very difficult to estimate the impact of the social and 

political crisis in the Middle East and north Africa. The 

same is true for the catastrophes that have hit Japan since 

11 March. We expect these to have no material effect on 

confidence, but a negative impact cannot be ruled out, 

mainly through fear of higher energy prices in the long run. 


Market Mover 

70 



Chart 5: US Confidence vs Consumption 


% m/m Feb (f) Jan Dec Nov 

Personal Income 0.2 1.0 0.4 0.3 

Consumption 0.7 0.2 0.5 0.3 

Core PCE Prices 0.2 0.1 0.0 0.1 

Key Point: 

Nominal spending should surge on a real rebound 

and a surge in inflation; income should be more 

subdued. 

BNP Paribas Forecast: Moderate gains 

US: Personal Income & Spending (Feb) 

Release Date: Monday 28 March 

Personal consumption is forecast to rise 0.7% in February 

after a 0.2% gain in January that will be driven in part by a 

0.4% gain in prices as rising food and gasoline prices 

boosted nominal spending growth. On a real basis, 

consumers should increase spending 0.3% after a 0.1% 

decline a month prior as spending on autos picked up and 

service spending should rebound a little. On balance, 

consumers appear to be taking a breather after a strong 

pick-up in Q4 and we look for a moderate gain in Q1 

overall. 

Meanwhile, personal income is forecast to rise a paltry 

0.2% as wages and hours worked were both flat in 

February. This comes after a 1.0% surge that was driven 

by the implementation of the payroll tax holiday. The surge 

in spending combined with subdued income growth should 

lead the personal saving rate to fall back a little. 

The core PCE price index is expected to rise 0.2% in 

February, which would lead the y/y pace to pick up to 0.9% 

from the record low of 0.8%. Core inflation remains well 

below the Fed’s comfort zone but incoming data suggest 

the trough is behind us. 

Chart 6: Japanese Unemployment Rate (% s.a.) 

6.0 

5.5 

5.0 

4.5 

4.0 

3.5 

00 01 02 03 04 05 06 07 08 09 10 11 


% s.a. Feb (f) Jan Dec Nov 

Unemployment rate 4.9 4.9 4.9 5.1 

Key Point: 

The earthquake/tsunami has resulted in job losses 

for many in the quake-hit regions, but this will not 

rapidly translate into a higher unemployment rate. 

BNP Paribas Forecast: Flat 

Japan: Unemployment Rate (February) 

Release Date: Tuesday 29 March 

We expect the unemployment rate for February to remain 

at 4.9% for the third straight month. In the January report, 

seasonal adjustments were recalibrated and past data 

were revised to iron out distortions linked to the Lehman 

shock. 

As a result, the trend for the jobless rate is more moderate. 

The rate hit a high of 5.5% in July 2009, steadily improving 

thereafter. In any event, despite improvements on the job 

front, the decline is being hampered by the growing 

number of individuals seeking new jobs (including 

discouraged workers) or better working conditions 

(dissatisfied jobholders). 

Meanwhile, the earthquake/tsunami on 11 March has 

resulted in job losses for many in the quake-hit regions. 

However, we do not expect this to quickly translate into a 

higher jobless rate as many people are in no condition to 

start job hunting, while those who are should easily find 

positions in reconstruction-related projects. 


Market Mover 

71 



Chart 7: Germany Cost of Living 



CoL % m/m 0.5 0.5 -0.4 1.0 

CoL % y/y 2.2 2.1 2.0 1.7 

HICP % m/m 0.6 0.6 -0.6 1.2 

HICP % y/y 2.3 2.2 2.0 1.9 

Key Point: 

We expect another uptick in headline inflation, 

reflecting higher energy prices. 

BNP Paribas Forecast: Another increase 

Germany: Preliminary CoL (March) 


We expect German inflation to tick slightly higher in March, 

up to 2.2% y/y on the national measure. The acceleration is 

likely to reflect slightly higher energy, while food and core 

inflation is stable. 

While we expect food prices to post a chunky increase, that 

will be set against a similar sized increase a year ago. The 

impact on y/y inflation should therefore be neutral this 

month. We expect an increasing addition to headline 

inflation from next month onwards as this base effect 

passes. 

Meanwhile, we expect energy inflation to accelerate, 

largely due to housing energy. With regard to transport 

energy, although fuel costs are likely to have risen by a 

substantial 4½% m/m, that is around a percentage point 

slower than the same month a year ago. Combined, energy 

price inflation is likely to stand slightly above 10% y/y. 

Core inflation is likely to move sideways at 0.8% y/y. 

Clothes inflation has been surprisingly subdued in the last 

two months. That is despite the surge in cotton prices that 

has caused sharp increases in other economies. We 

expect some catch-up in March. 

Chart 8: French Sales of Manuf. Goods (3m avg) 

16 

12 

8 

4 

0 

-4 

Total (% 3m/3m annualised) 

-8 

Sales excl. autos (% 3m/3m annualised) 

-12 

Jan May Sep Jan May Sep Jan May Sep Jan May Sep 

07 08 09 10 


Volume Feb (f) Jan 11 Dec Feb 10 

SA-WDA 

% m/m 0.9 -0.4 0.4 -1.7 

% y/y 5.0 2.4 0.1 1.1 

Key Point: 

Car and electronic goods are likely to support sales 

in February, and a strong base effect will boost the 

y/y change. 

BNP Paribas Forecast: Dynamic 

France: Hh Consumption of Manuf. Goods (February) 


Over the past few months, the strength of car sales has 

driven total retail sales of manufactured goods (see chart). 

New car registrations were still particularly strong in 

February, which should support the next retail sales report. 

The ending of the government car purchase incentive was 

followed by promotions from manufacturers, allowing them 

to capture a client base that was not eligible for the 

government incentives. 

The late start of seasonal sales may also provide extra 

support to February sales. In the last two months, sales of 

electronic goods have been dynamic. The progressive 

ending of analogue TV broadcasting (especially on 8 

March in the Paris region) is boosting sales of new TV sets 

and recorders. 

The sharp decline in household confidence in December 

has not led to a fall in private consumption. We do not 

expect a setback in February. 

We forecast sales up nearly 1% m/m and 5% y/y in real 

terms. This strength is also a result of a favourable base 

effect as sales were unusually weak in February last year. 


Market Mover 

72 



Chart 9: US Consumer Confidence 


Mar (f) Mar 2H Mar p Feb 

Conference Board 55.0 - - 70.4 

Michigan Sentiment 66.6 65.0 68.2 77.5 

BNP Paribas Forecast: Down 

US: Consumer Confidence (March) 


The University of Michigan index of consumer confidence 

dropped sharply at the beginning of March, driven by 

surging gasoline prices and the Middle East turmoil. This 

follows a recent series of increases driven by improving 

labour market conditions. While the index of unfavorable 

news heard about unemployment has dropped to the 

lowest level since the middle of 2007, the index of 

unfavorable news about high prices has hit the highest 

level since the end of 2008. We expect the University of 

Michigan index to decline further in the second half of the 

month on disturbing news from Japan. Similarly, global 

events could shatter consumer optimism. This is likely to 

be reflected in the Conference Board index, which we 

expect to plunge to 55.0 in March from 70.4 in the previous 

month. 

Key Point: 

Global events could shatter consumer optimism. 

This is likely to be reflected by the Conference 

Board index, which we expect to plunge to 55.0 in 

March from 70.4 in the previous month. 

Chart 10: Japanese Production and Exports 

120 

115 

110 

105 

100 

95 

90 

85 

80 

75 

70 

65 

(2005=100, seasonally adjusted) 

Production 

00 01 02 03 04 05 06 07 08 09 10 11 


Exports (RHS) 

150 

140 

130 

120 

110 

100 

90 

80 

70 

60 

50 

Feb (f) Jan Dec Nov 

% m/m 0.7 1.3 3.3 3.0 

Key Point: 

Although production is expected to expand for a 

fourth straight month, the earthquake/tsunami will 

likely cause a sharp downturn in coming months. 

BNP Paribas Forecast: Up, For Now 

Japan: Industrial Production (February) 

Release Date: Wednesday 30 March 

We expect production in February to expand 0.7% m/m, 

marking a fourth straight advance. After a soft patch in the 

summer, factory activity has revived thanks to the upturn in 

global manufacturing. While a degree of caution is in order 

given the upward bias in the METI data, various sentiment 

surveys also indicated that business conditions were 

improving for manufacturers. 

Unfortunately, however, the earthquake/tsunami on 11 

March will likely cause a sharp downturn in factory activity 

in the coming months. Beyond the damage to capital stock 

and infrastructure from the earthquake itself, power 

shortages in Kanto (Tokyo area) and Tohoku will become a 

big constraint on production. 

On the demand side, deterioration in household and 

corporate sentiment should lead to weaker domestic 

consumption. The upcoming production report will include 

forecasts for March and April, but because the cut-off date 

for the survey is the 10 th , these forecasts will not reflect the 

earthquake disaster. 


Market Mover 

73 



10 

-5 

-10 

-15 

-20 

-25 

-30 

-35 

-40 

Chart 11: Eurozone Sentiment by Sector 

5 

0 

Consumer 

Industry 

Construction 

99 00 01 02 03 04 05 06 07 08 09 10 11 


Mar Feb Jan Dec 

Economic Sentiment 107.3 107.8 106.8 106.9 

Industry 6 7 6 5 

Services 11 11 10 10 

Consumer -11 -10 -11 -11 

Key Point: 

Sentiment remains very elevated but recent external 

events point to a correction. 

BNP Paribas Forecast: Correction 

Eurozone: Economic Sentiment (March) 

Release Date: Wednesday 30 March 

The eurozone economic sentiment index improved in eight 

of the nine months to February, reaching its highest level 

since August 2007 prior to the financial crisis. 

The main driver of the improvement in sentiment has been 

the industrial sector. This is now back at the highs seen in 

the previous expansion (see chart). 

The run of adverse news in the latest survey period points 

to a drop in sentiment in March, with the tragic events in 

Japan accompanying a pick-up in uncertainty and oil prices 

related to developments in the MENA region. 

How the economic sentiment index has reacted to previous 

external shocks offers some perspective in assessing the 

upcoming data. Following 9/11, economic sentiment fell by 

two points in the same month as the terrorist attacks took 

place. 

We are forecasting a more moderate decline this time, in 

line with the signals from the survey data already released 

at the time of writing. They suggest that manufacturing 

activity in the eurozone moderated but the service sector 

remained relatively unaffected. 

Price indices in the EC survey, from both a business and 

household perspective, will remain very elevated. 


Chart 12: Eurozone HICP 


HICP % m/m 1.2 0.4 -0.7 0.6 

HICP % y/y 2.5 2.4 2.3 2.2 

HICP Core % m/m 1.2 0.3 -1.6 0.4 

HICP Core % y/y 1.0 1.0 1.1 1.0 

Key Point: 

We expect an acceleration in headline inflation on 

the back of faster food and energy price inflation. 

BNP Paribas Forecast: Up Again 

Eurozone: HICP Flash (March) 

Release Date: Thursday 31 March 

We expect headline eurozone inflation to accelerate again 

in March, to stand at 2.5% y/y – the highest since October 

2008. Although no breakdown is published at this stage, 

when it is released we expect the acceleration to reflect a 

combination of higher food and energy price inflation, while 

core inflation is stable. 

More specifically, we expect food inflation to continue to 

accelerate and the HICP to catch up with the surge in 

agricultural commodities. We expect further upside beyond 

March, helping to push headline inflation yet higher. 

Meanwhile, energy price inflation is likely to accelerate by 

½ percentage point to 13.5% y/y. The extent of the 

acceleration is likely to be limited by base effects due to the 

sizeable increase posted this time last year. 

Meanwhile, core inflation is likely to be stable at 1.0% y/y, 

though with risks skewed to the upside. In particular, we 

expect clothes inflation to accelerate – again reflecting a 

catch-up with the jump in raw materials prices. More 

sluggish increases elsewhere in the breakdown are likely to 

hold back an acceleration in overall core inflation for now. 

However, that is likely to be temporary and we expect the 

acceleration in core inflation to resume in the coming 

months. 


Market Mover 

74 



Chart 13: Japanese Tankan 

Actual Expectation Actual Expectation 

Business Large manufacturers 5 -2 2 -3 

conditions Large non-manufacturers 1 -1 -2 -7 

DI Small manufacturers -12 -23 -16 -24 

Small non-manufacturers -22 -29 -26 -34 

Large enterprises 

Capex plan (*) Manufacturers 

(FY2011) Non-manufacturers 

(% y/y) Small enterprises 

Manufacturers 

Non-manufacturers 


December Survey 

March Survey 

(BNPP forecast) 

1.0 

1.5 

0.7 

-22.7 

-20.5 

-24.0 

Business condition DI Mar (f) Dec (f) Sep Jun 

Large manufactures 2 5 8 1 

Large nonmanufactures -2 1 2 -5 

Key Point: 

Because only a small proportion of responses will 

reflect the earthquake disaster, the March Tankan 

cannot be deemed an accurate assessment of 

corporate sentiment. 

BNP Paribas Forecast: Inaccurate 

Japan: Tankan (March) 

Release Date: Friday 1 April 

In the BoJ’s March Tankan, we expect the current 

conditions DI for large manufacturers to fall 3 points to 2 

and the DI for large nonmanufacturers to also drop 3 

points, to -2. While the survey period (late February 

through the end of March) straddles the 11 March 

earthquake/tsunamis, most companies (roughly 70%) tend 

to send in their replies prior to what the BoJ designates as 

the ‘record date’, which this time happened to be 11 March. 

Thus, the upcoming Tankan will only partially reflect the 

earthquake disaster. Prior to the quake, it seemed that the 

recovery of global manufacturing would put the Japanese 

economy back on a recovery track in 2011 after the soft 

patch that began in the summer. However, the earthquake 

has dramatically changed the near-term outlook. 

The March Tankan cannot be deemed an accurate 

assessment of corporate sentiment. We expect the strongly 

pessimistic assessments from companies responding after 

the quake to temper the growing optimism of those 

responding before the quake, with the result that the overall 

tone will be modestly downbeat. 

Chart 14: UK CIPS Manufacturing vs Industrial 

Production 



CIPS Manufacturing 60.5 61.5 61.5 58.7 

Key Point: 

We expect a slight dip in March, but the level of the 

index will remain super-strong. 

BNP Paribas Forecast: Dipping 

UK: CIPS Manufacturing (March) 

Release Date: Friday 1 April 

We expect the manufacturing sector CIPS to nudge lower 

in March, while remaining extremely high. At 61.5, the 

headline index is at its highest level on record. At that level, 

the survey is consistent with very robust expansion in 

industrial production, which should provide a solid 

contribution to headline GDP growth this year. 

The buoyancy of the survey has been driven by robust 

orders, particularly from overseas. Although the weakness 

of the GBP exchange rate has helped, the strength of the 

UK’s biggest export partner in the eurozone – Germany – 

has been a major boost. 

We expect a minor setback in March on the back of the 

increase in global uncertainty following the unfortunate 

events in Japan. Similarly, the jump in the price of oil has 

intensified the burden of costs on firms, only part of which 

is being passed on to end customers. That is likely to be a 

drag, though it shouldn’t derail the recovery in the sector. 

Overall, we expect a dip but the overriding message is that 

manufacturing is powering ahead. 


Market Mover 

75 


Economic Calendar: 4 – 29 April 

4 April 5 April 6 April 7 April 8 April 

Eurozone: PPI Feb Australia: RBA Rate 

Announcement, Trade 

Balance Feb 

Eurozone: Services PMI 

(Final) Mar, Retail Sales 

Feb 

UK: CIPS Services Mar 

US: ISM Services Mar, 

FOMC Minutes 

Japan: Leading 

indicator Feb 

Eurozone: GDP (Final) 

Q4 

UK: Industrial 

Production Feb 

Germany: Factory 

Orders Feb 

Spain: Industrial 


Switz: CPI Mar 

Japan: BoJ Rate 

Announcement 

Australia: Labour Mar 

Eurozone: ECB Rate 

Announcement 

UK: BoE Rate Ann. 

Germany: IP Feb 

France: Trade Balance Feb 

Norway: IP Feb 

Neths: CPI Mar 

US: Consumer Credit Feb 

During Week: UK Halifax House Prices Mar 


Japan: Machinery Orders 

Feb 

France: Industrial 


Italy: Industrial Production 

Feb 

Norway: CPI Mar, PPI Mar 


Market Mover 

Japan: M2 Mar, BoJ 

Minutes 

Australia: NAB Business 

Confidence Mar 

UK: RICS HP Mar, DCLG 

House Prices Feb, Trade 

Bal. Feb, CPI Mar 

Germany: CPI Mar, ZEW 

Survey Apr 

France: Current Acc. Feb 

Spain: CPI Mar 

Sweden: CPI Mar 

US: Trade Bal. Feb, Import 

Prices Mar, NFIB Small 

Business Optimism Mar, 

Treasury Statement Mar 

Canada: BoC Rate Ann. 

Japan: CGPI Mar 

Australia: Westpac 

Consumer Confidence 

Apr 

Eurozone: Industrial 


UK: Labour Mar 

France: CPI Mar 

Sweden: Labour (nsa) 

Mar 

US: Retail Sales Mar, 

Business Inventories 

Feb, Beige Book 

Canada: BoC Monetary 

Policy Report 

Eurozone: ECB Monthly 

Bulletin 

Neths: Retail Sales Feb 

US: PPI Mar 


UK: Rightmove House 

Prices Apr 

US: NAHB Housing Index 

Apr 

Australia: RBA Minutes 

Eurozone: Current 

Account Feb, EU25 New 

Car Registrations Mar, 

PMIs (Flash) Apr 

US: New Home Starts Mar 

Canada: CPI Mar 

Japan: Trade Bal. Mar, 

Tertiary Index Feb 

UK: BoE Minutes, PSNB 

Mar, PSNCR Mar 

Germany: PPI Mar 

Italy: Indust. Orders Feb 

Sweden: Riksbank Rate 

Announcement 

Belgium: Consumer 

Confidence Apr 

Neths: Consumer 


US: Existing Home Sales 

Mar 

Australia: PPI Q1 

UK: Retail Sales Mar 

Germany: Ifo Survey Apr 

Italy: Non-EU Trade 

Balance Mar 

Belgium: Business 


Neths: Labour Mar 

US: Philly Fed Apr, FHFA 

HPI Feb, Leading 

Indicators Mar 


Spain: PPI Mar 

US: New Home Sales Mar 

Neths: Producer 


Sweden: Labour Mar 

US: S&P/Case-Shiller 

Home Prices Feb, 

Consumer Confidence Apr 

Japan: Retail Sales Mar 

Australia: CPI Q1 

Eurozone: Industrial 

Orders Feb 

UK: GDP (Adv) Q1 

Germany: CPI (Prel) 

Apr, GfK Consumer 

Confidence May 

France: Consumer 

Confidence Apr, Housing 

Starts Mar, Job Seekers 

Mar 

US: Durable Goods 

Orders Mar, FOMC Rate 

Announcement 

During Week: Germany Retail Sales Mar, Import Prices Mar, UK Nationwide House Prices Apr 


Japan: CPI Tokyo Apr, 

CPI National Mar, Labour 

Mar, Household 

Consumption Mar, IP Mar, 

Housing Starts Mar, BoJ 

Rate Announcement & 

Outlook Report 

UK: GfK Consumer 


Germany: Labour Mar 

France: Retail Sales Mar 

Belgium: CPI (Apr) 

Sweden: Consumer 

Confidence Apr, PPI Mar 

US: GDP (Adv) Q1, 

Pending Home Sales Mar 

Japan: Current Account 

Feb 

UK: PPI Mar 

Germany: Trade 

Balance Feb 

France: Budget Balance 

Feb, BoF Survey Mar 

Sweden: IP Feb 

Neths: IP Feb 

US: Wholesale Trade Mar 

Canada: Labour Mar 

Eurozone: Trade 

Balance Feb, HICP Mar 

Italy: EU Trade Balance 

Feb, CPI (Prel) Mar 

US: Empire State Survey 

Apr, CPI Mar, Industrial 

Production Mar, UoM 

(Prel) Apr, TICS Data 

Feb 

Holiday: Australia, 

Germany, Neths, UK, 

Spain, Sweden, Norway, 

Switz, Canada, US, 

France: Industry Survey 

Apr 

Italy: Retail Sales Feb 

Japan: Holiday 

Eurozone: Eurocoin Apr, 

Monetary Developments 

Mar, Labour Mar, HICP 

(Flash) Apr, Business & 

Consumer Survey Apr 

France: PPI Mar 

Italy: CPI (Prel) Apr, PPI 

Mar 

Spain: Retail Sales Mar, 

Labour Q1, HICP (Flash) 

Apr 

Sweden: Retail Sales Mar 

Norway: Labour Apr 

Switz: KOF Leading 

Indicator Apr 

US: Personal Income & 

Spending Mar, ECI Q1, 

Chicago PMI Apr, UoM 

Sentiment (Final) Apr 

Canada: GDP Feb 

Release dates as at c.o.b. prior to the date of this publication. See our Daily Spotlight for any revisions 

76 


Treasury and SAS Issuance Calendar 

In the pipeline - Treasuries: 

Germany: As announced in December, intends to issue inflation-linked federal securities (EUR 2-3bn) in Q2; reserves the right to issue foreign 

currency bonds, as market conditions permit 

Greece: Will return to the market in April 

Poland: Min. USD 1bn benchmark planned for H1 

Belgium: Cancelled its OLO auction initially scheduled for 28 March 

Belgium: Plans to launch a new syndicated 15- or 20-year benchmark bond later this year, depending on market conditions 

Finland: To launch another new euro-denominated benchmark bond in 2011 

Czech Rep.: May sell up to EUR 2bn of bonds in May 

In the pipeline – Agencies: 

EFSF: Plans to issue a second benchmark bond, likely a 10y maturity, in Q2 

Date Day Closing Country Issues Details BNPP forecasts 

Local GMT 

25/03 Fri 11:00 15:00 US Outright Treasury Coupon Purchase (2012 - 2013) USD 4-6bn 

28/03 Mon 10:55 08:55 Italy CTZ 31 Dec 2012 EUR 2.5bn 

11:00 15:00 US Outright Treasury Coupon Purchase (2015 - 2016) USD 5.5-7.5bn 

13:00 17:00 US Notes 0.625% 31 Mar 2013 (new) USD 35bn 

29/03 Tue 10:55 08:55 Italy BTPei 2.1% 15 Sep 2016 EUR 1.25-1.75bn 

12:00 16:00 Canada Repurchase of 10 Cash Mgt Bonds (Jun11 to Jun12) CAD 1bn 

11:00 15:00 US Outright TIPS Purchase (2013 - 2041) USD 1-2bn 

13:00 17:00 US Notes 2% 31 Mar 2016 (new) USD 35bn 

30/03 Wed 10:55 08:55 Italy BTP 3% 1 Apr 2014 (new) 

CCTeu 15 Oct 2017 

25 Mar EUR 9-10bn 

BTP 4.75% 1 Sep 2021 


13:00 17:00 US Notes 2.75% 31 Mar 2018 (new) USD 29bn 

31/03 Thu 11:00 15:00 US Outright Treasury Coupon Purchase (2021 - 2027) USD 1.5-2.5bn 

04/04 Mon Slovak Rep. SLOVGB (#217) (new) 


05/04 Tue 12:00 03:00 Japan JGB 10-year 29 Mar JPY 2.2tn 

11:00 09:00 Austria RAGBs 29 Mar EUR 1.3bn 


06/04 Wed 11:00 09:00 Germany Schatz 1.5% 15 Mar 2013 EUR 5bn 

11:00 09:00 Sweden T-bonds 30 Mar SEK 2bn 


07/04 Thu 10:30 08:30 Spain Bono 3-year (new) 4 Apr EUR 3-4bn 

10:50 08:50 France OATs 1 Apr EUR 7-9bn 


08/04 Fri 12:00 03:00 Japan Auction for Enhanced-liquidity 1 Apr JPY 0.3tn 

11/04 Mon 11:00 15:00 US Outright Treasury Coupon Purchase (2016 - 2018) USD 6.5-8.5bn 

12/04 Tue 12:00 03:00 Japan JGB 30-year 5 Apr JPY 0.7tn 

Neths DSLs 6 Apr EUR 3-4bn 

Denmark DGB 2% 15 Nov 2014 (new) DKK 5bn 

13:00 17:00 US Notes 3-year (new) 7 Apr USD 32bn 

13/04 Wed 11:00 09:00 Germany Bund 3.25% 4 Jul 2042 EUR 2bn 

10:30 09:30 Portugal OTs (To be confirmed) 7 Apr EUR 0.75-1.25bn 

13:00 17:00 US Notes 10-year 7 Apr USD 21bn 

14/04 Thu 12:00 03:00 Japan JGB 5-year 7 Apr JPY 2.4tn 

10:55 08:55 Italy 5-year BTP and possibly 15- or 30-year BTP 7 Apr EUR 5-7bn 

11:00 09:00 Sweden ILBs 7 Apr SEK 0.75bn 

13:00 17:00 US Bond 30-year 7 Apr USD 13bn 

18/04 Mon 12:00 10:00 Belgium OLOs 11 Apr EUR 2-3bn 

19/04 Tue 12:00 03:00 Japan Auction for Enhanced-liquidity 12 Apr JPY 0.3tn 

20/04 Wed 10:30 08:30 Spain Obligaciones 7 Apr EUR 3-4bn 

11:00 09:00 Germany OBL 8 Apr 2016 (Series 160) (new) EUR 6bn 

11:00 09:00 Sweden T-bonds 13 Apr SEK 2bn 

21/04 Thu 12:00 03:00 Japan JGB 20-year 14 Apr JPY 1.1tn 

10:50 08:50 France BTANs 2- &/or 5-year 15 Apr EUR 7-9bn 

11:50 09:50 France OATis , OATeis, BTANeis 15 Apr EUR 1.5-2bn 

Slovak Rep. SLOVGB 4% 27 Apr 2020 (#214) 

13:00 17:00 US TIPS 5-year (new) 14 Apr USD 12bn 

Sources: Treasuries, BNP Paribas 



77 


Next week's T-Bills Supply 

Date Country Issues Details 

25/03 UK T-Bills Apr 2011 GBP 1.5bn 

T-Bills Jun 2011 

GBP 1.5bn 

T-Bills Sep 2011 

GBP 1.5bn 

28/03 France BTF Jun 2011 EUR 3.5bn 

BTF Oct 2011 

EUR 2bn 

BTF Nov 2011 

EUR 1bn 

BTF Mar 2012 

EUR 1bn 

Italy BOT Sep 2011 EUR 8bn 

Germany Bubills Mar 2012 (new) EUR 3bn 

US T-Bills Jun 2011 USD 32bn 

T-Bills Sep 2011 (new) USD 30bn 

FHLMC Bills 3-month & 6-month 25 Mar 

29/03 Canada T-Bill Jul 2011 CAD 7.7bn 

T-Bill Sep 2011 

CAD 2.9bn 

T-Bill Mar 2012 

CAD 2.9bn 

US T-Bills 4-week 28 Mar 

FHLB Discount Notes 

30/03 Sweden T-Bills Sep 2011 SEK 10bn 

Denmark T-Bills 28 Mar 

FNMA Bills 3-month & 6-month 28 Mar 

31/03 FHLB Discount Notes 

01/04 Japan T-Bills 3-month 25 Mar 

UK T-Bills 25 Mar 

Sources: Treasuries, BNP Paribas 

Next week's Eurozone Redemptions 

Date Country Details Amount 

28/03 Belgium OLO 3.5% (OLO 53) EUR 6.2bn 

30/03 Greece GGB 5.35% EUR 0.2bn 

31/03 Italy CTZ EUR 11.6bn 

Total Eurozone Long-term Redemption 

EUR 18bn 

30/03 Germany Bubills EUR 6.0bn 

31/03 France BTF EUR 5.1bn 

31/03 Italy BOT (6m) EUR 9.1bn 

31/03 Neths DTC EUR 17.4bn 

31/03 Austria ATB (EU26) EUR 0.1bn 

Total Eurozone Short-term Redemption EUR 37.7bn 

25 

20 

Next week's Eurozone Coupons 

Country 

Italy 

Belgium 

Austria 

Greece 

Total Long-term Coupon Payments 

Chart 1: Investors’ Net Cash Flows 

(EUR bn, 10y equivalent) 

Amount 

EUR 0.1bn 

EUR 6.1bn 

EUR 0.1bn 

EUR 0.0bn 

EUR 6.3bn 

Net Investors' Cash Flows 

(EUR bn , 10y equivalent) 

15 

10 

5 

Comments and charts 

• EGB supply will remain below average in the week 

ahead as only Italy is scheduled to issue paper. We 

expect gross EGB supply to reach EUR 14bn (including 

CTZ) in the week ahead from EUR 10.5bn in the past 

week. In 10y duration adjusted terms, it will fall to EUR 

5.6bn from EUR 7bn in the past week. 

• Italy will kick off issuance with a tap of CTZ Dec-12 

on Monday for EUR 2.5bn. Then on Tuesday it will 

reopen index-linked BTPei Sep-16 for EUR 1.5-2bn. 

Finally, on Wednesday, it will launch a new 3y BTP Apr- 

14 and reopen CCT Oct-17 and BTP Sep-21 for a total 

expected amount of EUR 9-10bn. 

• Outside the eurozone, the US will issue USD 99bn 

of 2y, 5y and 7y notes and will carry on with its purchase 

programme. Canada will also repurchase (Cash 

Management) Bonds for CAD 1bn. 

0 

-5 

25 

20 

15 

10 

5 

0 

Week of Mar 21st Week of Mar 28th Week of Apr 4th Week of Apr 11th 

Chart 2: EGB Gross Supply Breakdown by 

Country (EUR bn, 10y equivalent) 

Germany Italy Portugal Belgium 

France Spain Netherlands Austria 

Finland Greece Ireland 


Chart 3: EGB Gross Supply Breakdown by 

Maturity (EUR bn, 10y equivalent) 

18 

16 

14 

12 

EGBs Gross Supply (EUR bn, 10y equivalent) 

2-3-YR 5-7-YR 

10-YR >10-YR 

10 

8 

6 

4 

2 

0 





78 


Central Bank Watch 

Interest Rate 

EUROZONE 

Current 

Rate (%) 

Minimum Bid Rate 1.00 

US 

Fed Funds Rate 0 to 0.25 

Discount Rate 0.75 

JAPAN 

Call Rate 0 to 0.10 

Basic Loan Rate 0.30 

UK 

Bank Rate 0.5 

DENMARK 

Lending Rate 1.05 

SWEDEN 

Repo Rate 1.50 

NORWAY 

Sight Deposit Rate 2.00 

SWITZERLAND 

3 Mth LIBOR Target 

Range 

CANADA 

0.0-0.75 

Overnight Rate 1.00 

Bank Rate 1.25 

AUSTRALIA 

Cash Rate 4.75 

CHINA 

1Y Bank Lending 

Rate 

BRAZIL 

6.06 

Selic Overnight Rate 11.75 

Date of 

Last 

Change 

-25bp 

(7/5/09) 

-75bp 

(16/12/08) 

+25bp 

(18/2/10) 

-10bp 

(5/10/10) 

-20bp 

(19/12/08) 

-50bp 

(5/3/09) 

-10bp 

(14/1/10) 

+25bp 

(15/2/11) 

+25bp 

(5/5/10) 

-25bp 

(12/3/09) 

+25bp 

(8/9/10) 

+25bp 

(8/9/10) 

+25bp 

(2/11/10) 

+25bp 

(8/2/11) 

+50bp 

(2/3/11) 

Next Change in 

Coming 6 Months 

+25bp (7/4/11) 

No Change 

No Change 

No Change 

No Change 

+25bp 

(5/5/11) 

No Change 

+25bp 

(20/4/11) 

+25bp 

(12/5/11) 

No Change 

No Change 

No Change 

No Change 

+25bp 

(Mar 11) 

+50bp 

(20/4/11) 


For the full EMK Central Bank Watch, please see our Local Markets Mover. 

Comments 

The combination of recent speeches and macroeconomic news 

suggests the ECB is likely to deliver the rate hike that had been 

lined up for April at the previous meeting in early March. 

The FOMC is expected to maintain the funds rate at 0 to 0.25% 

until June 2012. It will execute its QE2 programme through H1 

2011; we no longer expect QE3. 

We expect the BoJ to continue to respond to the developments 

surrounding earthquake disaster by expanding liquidity. 

Events in Japan are likely to have reduced the upside skew to 

the BoE’s inflation projection. Hence the case for a hike as soon 

as May has weakened. 

Higher money market rates in the eurozone are likely to 

continue to put pressure on the krone. Thus, further increases in 

the interest rate on certificates of deposit are on the agenda. 

Strong domestic economic growth and higher inflationary 

pressures ahead should lead to further rate hikes. We expect 

the Riksbank to deliver the next hike at April’s meeting. 

The Norges Bank’s March statement had a hawkish tone, 

supporting our view that a rate hike will be delivered in Q2. We 

are looking for a hike in May, with a risk of it being delayed to 

June. 

The economy has continued to outperform despite the strong 

Franc, but the central bank remains very cautious about the 

exchange rate. We have no hike until Q3 but an ECB hike in Q2 

could give them room to move earlier. 

In light of developments in global financial markets, the US 

economic outlook, a strong CAD and low core inflation, the BoC 

is likely to pause to allow further progress in the recovery. Rate 

hikes should resume in 2012. 

The effective cash rate is moderately restrictive while financial 

and monetary conditions are outright tight. Below-trend growth 

is likely this year, especially given the impact of the Queensland 

floods. Underlying inflation is contained, albeit with upside risks. 

There is little need for further tightening in the near term. 

The latest rate hike points to policymakers’ hawkish view on 

inflation and asset bubbles. As CPI inflation is very likely to hit 

5.5% in Q1 and stay high for some months, we expect a further 

100bp in hikes to the benchmark rate in 2011. 

After being on hold since July 2010, the BCB hiked 50bp in 

January 2011 and again in March 2011. In light of a worrisome 

inflation picture, the monetary authority is likely to continue 

tightening policy in coming months. 

Change since our last weekly in bold and italics 


Market Mover 

79 


FX Forecasts* 

USD Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

EUR/USD 1.41 1.45 1.46 1.40 1.37 1.33 1.30 1.29 1.33 1.34 1.35 

USD/JPY 83 84 86 92 93 98 102 105 119 118 116 

USD/CHF 0.93 0.94 0.96 0.98 0.99 1.02 1.06 1.09 1.06 1.07 1.07 

GBP/USD 1.62 1.65 1.62 1.52 1.51 1.48 1.46 1.48 1.66 1.70 1.73 

USD/CAD 0.95 0.96 0.93 0.95 0.98 1.00 1.05 1.09 1.11 1.14 1.16 

AUD/USD 1.02 0.99 0.92 0.93 0.92 0.93 0.92 0.90 0.87 0.85 0.83 

NZD/USD 0.79 0.78 0.74 0.73 0.72 0.69 0.67 0.66 0.64 0.62 0.60 

USD/SEK 6.24 6.00 5.89 6.07 6.28 6.54 6.69 6.74 6.99 6.94 6.96 

USD/NOK 5.53 5.17 5.00 5.14 5.40 5.64 5.85 5.81 5.49 5.30 5.19 

EUR Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

EUR/JPY 117 122 126 129 127 130 133 135 158 158 157 

EUR/GBP 0.87 0.88 0.90 0.92 0.91 0.90 0.89 0.87 0.80 0.79 0.78 

EUR/CHF 1.31 1.36 1.40 1.37 1.35 1.36 1.38 1.40 1.41 1.44 1.44 

EUR/SEK 8.80 8.70 8.60 8.50 8.60 8.70 8.70 8.70 9.30 9.30 9.40 

EUR/NOK 7.80 7.50 7.30 7.20 7.40 7.50 7.60 7.50 7.30 7.10 7.00 

EUR/DKK 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 7.46 

Central Europe Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/PLN 2.77 2.72 2.67 2.71 2.85 2.89 2.92 2.91 2.78 2.69 2.74 

EUR/CZK 24.7 24.5 24.3 24.5 24.1 23.9 23.8 23.5 23.7 24.0 23.5 

EUR/HUF 275 280 275 275 269 265 265 260 260 255 260 

USD/ZAR 7.00 6.90 6.80 7.15 7.30 7.25 7.25 7.40 7.20 7.10 7.00 

USD/TRY 1.59 1.54 1.46 1.52 1.58 1.64 1.62 1.60 1.59 1.59 1.56 

EUR/RON 4.15 4.05 4.20 4.15 4.20 4.15 4.10 4.05 4.20 4.20 4.10 

USD/RUB 27.69 27.03 27.34 28.22 28.72 28.30 28.63 28.31 27.86 27.32 28.51 

EUR/PLN 3.90 3.95 3.90 3.80 3.90 3.85 3.80 3.75 3.70 3.60 3.70 

USD/UAH 7.9 7.9 7.8 7.8 7.5 7.5 7.5 7.5 7.5 7.5 7.5 

EUR/RSD 105 115 105 100 98 97 96 95 93 92 91 

Asia Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/SGD 1.25 1.23 1.22 1.21 1.21 1.20 1.19 1.18 1.17 1.16 1.15 

USD/MYR 3.03 3.00 2.95 2.90 2.87 2.85 2.83 2.80 2.77 2.75 2.73 

USD/IDR 8800 8600 8500 8400 8300 8200 8100 8000 7900 7800 7800 

USD/THB 30.50 30.00 29.80 29.50 29.30 29.00 28.70 28.50 28.30 28.00 28.00 

USD/PHP 43.00 42.50 42.00 41.50 41.00 40.50 40.00 39.50 39.00 39.00 39.00 

USD/HKD 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 7.80 

USD/RMB 6.53 6.50 6.47 6.45 6.40 6.35 6.30 6.26 6.23 6.20 6.17 

USD/TWD 28.70 28.00 27.70 27.30 27.00 26.70 26.50 26.00 26.00 26.00 26.00 

USD/KRW 1100 1070 1060 1050 1040 1030 1020 1010 1000 1000 1000 

USD/INR 45.50 46.00 45.50 45.00 44.50 44.00 43.50 43.00 43.00 42.50 42.50 

USD/VND 20500 20500 22550 22550 22550 22500 22500 22500 22500 22500 22500 

LATAM Bloc Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD/ARS 4.03 4.06 4.12 4.20 4.28 4.35 4.42 4.50 4.60 4.70 4.80 

USD/BRL 1.66 1.64 1.63 1.60 1.61 1.63 1.65 1.65 1.66 1.67 1.68 

USD/CLP 490 440 450 460 463 468 472 475 473 475 478 

USD/MXN 11.90 11.70 11.45 11.30 11.30 11.45 11.55 11.75 11.85 11.95 12.00 

USD/COP 1900 1875 1845 1870 1840 1800 1780 1760 1770 1780 1790 

USD/VEF 4.29 4.29 4.29 4.29 4.29 4.29 4.29 4.29 8.80 8.80 8.80 

USD/PEN 2.76 2.73 2.68 2.67 2.70 2.70 2.71 2.72 2.73 2.74 2.75 

Others Q1 '11 Q2 '11 Q3 '11 Q4 '11 Q1 '12 Q2 '12 Q3 '12 Q4 '12 Q1 '13 Q2 '13 Q3 '13 

USD Index 75.95 74.68 74.55 77.97 79.53 82.06 84.28 85.22 84.22 83.77 83.14 

*End Quarter 

(1) Following the devaluation of the VEF, there is now an official ‘priority’ exchange rate and a so-called ‘oil’ exchange rate used for certain transactions 


Foreign Exchange Strategy 24 March 2011 


80 


Market Coverage 

Market Economics 

Paul Mortimer-Lee Global Head of Market Economics London 44 20 7595 8551 paul.mortimer-lee@uk.bnpparibas.com 

Ken Wattret Chief Eurozone Market Economist London 44 20 7595 8657 kenneth.wattret@uk.bnpparibas.com 

Luigi Speranza Head of Inflation Economics, Eurozone, Italy London 44 20 7595 8322 luigi.speranza@uk.bnpparibas.com 

Alan Clarke UK London 44 20 7595 8476 alan.clarke@uk.bnpparibas.com 

Eoin O’Callaghan Inflation, Eurozone, Switzerland, Ireland London 44 20 7595 8226 eoin.ocallaghan@uk.bnpparibas.com 

Gizem Kara Scandinavia London 44 20 7595 8783 gizem.kara@uk.bnpparibas.com 

Dominique Barbet Eurozone, France Paris 33 1 4298 1567 dominique.barbet@bnpparibas.com 

Julia Coronado Chief US Economist New York 1 212 841 2281 julia.l.coronado@americas.bnpparibas.com 

Yelena Shulyatyeva US, Canada New York 1 212 841 2258 yelena.shulyatyeva@americas.bnpparibas.com 

Bricklin Dwyer US, Canada New York 1 212 471-7996 bricklin.dwyer@americas.bnpparibas.com 

Ryutaro Kono Chief Economist Japan Tokyo 81 3 6377 1601 ryutaro.kono@japan.bnpparibas.com 

Hiroshi Shiraishi Japan Tokyo 81 3 6377 1602 hiroshi.shiraishi@japan.bnpparibas.com 

Azusa Kato Japan Tokyo 81 3 6377 1603 azusa.kato@japan.bnpparibas.com 

Makiko Fukuda Japan Tokyo 81 3 6377 1605 makiko.fukuda@japan.bnpparibas.com 

Richard Iley Head of Asia Economics Hong Kong 852 2108 5104 richard.iley@asia.bnpparibas.com 

Dominic Bryant Asia, Australia Hong Kong 852 2108 5105 dominic.bryant@asia.bnpparibas.com 

Mole Hau Asia Hong Kong 852 2108 5620 mole.hau@asia.bnpparibas.com 

Xingdong Chen Chief China Economist Beijing 86 10 6561 1118 xd.chen@asia.bnpparibas.com 

Isaac Y Meng China Beijing 86 10 6561 1118 isaac.y.meng@asia.bnpparibas.com 

Chan Kok Peng Chief Economist South East Asia Singapore 65 6210 1946 kokpeng.chan@asia.bnpparibas.com 

Marcelo Carvalho Head of Latin American Economics São Paulo 55 11 3841 3418 marcelo.carvalho@br.bnpparibas.com 

Italo Lombardi Latin America New York 1 212 841 6599 italo.lombardi@americas.bnpparibas.com 

Nader Nazmi Latin America New York 1 212 471 8216 nader.nazmi@us.bnpparibas.com 

Florencia Vazquez Latin American Economist Buenos Aires 54 11 4875 4363 florencia.vazquez@ar.bnpparibas.com 

Michal Dybula Central & Eastern Europe Warsaw 48 22 697 2354 michal.dybula@pl.bnpparibas.com 

Julia Tsepliaeva Russia & CIS Moscow 74 95 785 6022 julia.tsepliaeva@ru.bnpparibas.com 

Interest Rate Strategy 

Cyril Beuzit Global Head of Interest Rate Strategy London 44 20 7595 8639 cyril.beuzit@uk.bnpparibas.com 

Patrick Jacq Europe Strategist Paris 33 1 4316 9718 patrick.jacq@bnpparibas.com 

Hervé Cros Chief Inflation Strategist London 44 20 7595 8419 herve.cros@uk.bnpparibas.com 

Shahid Ladha Inflation Strategist London 44 20 7 595 8573 shahid.ladha@uk.bnpparibas.com 

Alessandro Tentori Chief Alpha Strategy Europe London 44 20 7595 8238 alessandro.tentori@uk.bnpparibas.com 

Eric Oynoyan Europe Alpha Strategist London 44 20 7595 8613 eric.oynoyan@uk.bnpparibas.com 

Matteo Regesta Europe Alpha Strategist London 44 20 7595 8607 matteo.regesta@uk.bnpparibas.com 

Ioannis Sokos Europe Alpha Strategist London 44 20 7595 8671 ioannis.sokos@uk.bnpparibas.com 

Camille de Courcel Europe Alpha Strategist London 44 20 7595 8295 camille.decourcel@uk.bnpparibas.com 

Bülent Baygün Head of Interest Rate Strategy US New York 1 212 471 8043 bulent.baygun@americas.bnpparibas.com 

Mary-Beth Fisher US Senior Strategist New York 1 212 841 2912 mary-beth.fisher@us.bnpparibas.com 

Sergey Bondarchuk US Strategist New York 1 212 841 2026 sergey.bondarchuk@americas.bnpparibas.com 

Suvrat Prakash US Strategist New York 1 917 472 4374 suvrat.prakash@americas.bnpparibas.com 

Rohit Garg US Strategist New York 1212 841 3937 rohit.k.garg@americas.bnpparibas.com 

Anish Lohokare MBS Strategist New York 1 212 841 2867 anish.lohokare@americas.bnpparibas.com 

Olurotimi Ajibola MBS Strategist New York 1 212 8413831 olurotimi.ajibola@americas.bnpparibas.com 

Koji Shimamoto Head of Interest Rate Strategy Japan Tokyo 81 3 6377 1700 koji.shimamoto@japan.bnpparibas.com 

Tomohisa Fujiki Japan Strategist Tokyo 81 3 6377 1703 Tomohisa.fujiki@japan.bnpparibas.com 

Masahiro Kikuchi Japan Strategist Tokyo 81 3 6377 1703 masahiro.kikuchi@japan.bnpparibas.com 

Christian Séné Technical Analyst Paris 33 1 4316 9717 christian.séné@bnpparibas.com 

FX Strategy 

Hans Redeker Global Head of FX Strategy London 44 20 7595 8086 hans-guenter.redeker@uk.bnpparibas.com 

Ian Stannard FX Strategist London 44 20 7595 8086 ian.stannard@uk.bnpparibas.com 

James Hellawell Quantitative Strategist London 44 20 7595 8485 james.hellawell@uk.bnpparibas.com 

Kiran Kowshik FX Strategist London 44 20 7595 1495 kiran.kowshik@bnpparibas.com 

Ray Attrill FX Strategist New York 1 212 841 2492 raymond.attrill@us.bnpparibas.com 

Mary Nicola FX Strategist New York 1 212 841 2492 mary.nicola@americas.bnpparibas.com 

Andy Chaveriat Technical Analyst New York 1 212 841 2408 andrew.chaveriat@americas.bnpparibas.com 

Local Markets FX & Interest Rate Strategy 

Drew Brick Head of FX & IR Strategy Asia Singapore 65 6210 3262 Drew.brick@asia.bnpparibas.com 

Chin Loo Thio FX & IR Asia Strategist Singapore 65 6210 3263 chin.thio@asia.bnpparibas.com 

Robert Ryan FX & IR Asia Strategist Singapore 65 6210 3314 robert.ryan@asia.bnpparibas.com 

Jasmine Poh FX & IR Asia Strategist Singapore 65 6210 3418 jasmine.j.poh@asia.bnpparibas.com 

Gao Qi FX & IR Asia Strategist Shanghai 86 21 2896 2876 gao.qi@asia.bnpparibas.com 

Bartosz Pawlowski Head of FX & IR Strategy CEEMEA London 44 20 7595 8195 Bartosz.pawlowski@uk.bnpparibas.com 

Elisabeth Gruié FX & IR CEEMEA Strategist London 44 20 7595 8492 elisabeth.gruie@uk.bnpparibas.com 

Dina Ahmad FX & IR CEEMEA Strategist London 44 20 7 595 8620 dina.ahmad@uk.bnpparibas.com 

Erkin Isik FX & IR CEEMEA Strategist Istanbul 90 (216) 635 29 87 erkin.isik@teb.com.tr 

Raffaele Semonella EMEA Corporates Analyst London 44 20 7 595 8813 raffaele.semonella@uk.bnpparibas.com 

Diego Donadio FX & IR Latin America Strategist São Paulo 55 11 3841 3421 diego.donadio@@br.bnpparibas.com 

81

For Production and Distribution, please contact: 

Ann Aston, Market Economics, London. Tel: 44 20 7595 8503 Email: 0ann.aston@uk.bnpparibas.com, 

Danielle Catananzi, Interest Rate Strategy, London. Tel: 44 20 7595 4418 Email: 1Hdanielle.catananzi@uk.bnpparibas.com, 

Roshan Kholil, FX Strategy, London. Tel: 44 20 7595 8486 Email: 2Hroshan.kholil@uk.bnpparibas.com, 

Martine Borde, Market Economics/Interest Rate Strategy, Paris. Tel: 33 1 4298 4144 Email 3Hmartine.borde@bnpparibas.com 

Editors: Amanda Grantham-Hill, Interest Rate Strategy/Market Economics, London. Tel: 44 20 7595 4107 Email: 4Hamanda.grantham-hill@bnpparibas.com; 

Nick Ashwell, FX/Market Economics, London. Tel: 44 20 7595 4120 Email: 5Hnick.ashwell@uk.bnpparibas.com 

BNP Paribas Global Fixed Income Website 

6Hwww.globalmarkets.bnpparibas.com 

Bloomberg 

Fixed Income Research BPCM Market Economics BPEC 

Interest Rate Strategy BPBS Forex Strategy BPFR 

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