Market Mover - BNP PARIBAS - Investment Services India

EUR: Receive OIS/BOR SpreadsThis section is classified as non-objective research• The 12mth tender conducted this weekattracted reasonable demand but it was not thatstrong. However, both the amount of liquidityand its duration have increased.• In addition, EU decisions on Greece, theEFSF and banks, are likely to improve the creditquality assessment on banks. CDS have roomto fall.• STRATEGY: receive OIS/BOR spreads. Onthe Mar12, target 45bp (versus 58.5 currently).Chart 1: Cost of Carry Weighed onDemand for 12mth (EUR bn)Reasonable demand, but not that strong, for12mthAt its LTRO, the ECB allotted EUR 56.9bn for12 months. The number of bidders (181) was lowerthan at previous 12mth tenders conducted in 2009(even if we exclude the spectacular demand at thefirst one). Demand for 12mth liquidity was very closeto the lower bound of the range of expectations(EUR 50-200bn). We were expecting strongerdemand accompanied by lower demand for 3mthliquidity. However, demand at the 3mth tenderremained high, at EUR 44.6bn, while EUR 85bn wasexpiring. To summarise, more than a half of positionsrolled for another 3mth period and the rest for 12mth,while an additional EUR 16.5bn jumped into the12mth tender.The cost of carry prevented demand from being verystrong, although there were advantages to shiftingmore significantly from the 3mth to 12mth. Indeed,the rate on the 12mth tender will benefit from theECB’s rate cuts if the central bank delivers. Going forthe 3mth to benefit from potential rate cuts thereforemakes little sense. In addition, rolling from 3mth to3mth for a year is exposed to the risk of aninterruption of non-standard procedures for tendersnext year, even though this risk is now very small.However, although demand was lower than expectedat the 12mth tender, both the amount and theduration of liquidity provided by the ECB increasedafter this week’s operations. Liquidity is now muchmore than EUR 200bn above needs, and theduration of liquidity increased from 30 to 71 days.This is significant enough to allow stress on liquidityto ease somewhat. Banks’ funding is improving andthere is more certainty thanks to the extension of theduration of liquidity. Thus OIS/BOR spreads haveroom to tighten.Source: BNP ParibasChart 2: OIS/BOR Spreads are TighteningSource: BNP ParibasRisk assessment on banks to improveDecisions taken at the EU summit have majorimplications for banks. As the situation looks, to alarge extent, addressed, and the implications forbanks are largely manageable, the creditassessment on banks is likely to improve in the nearterm. The early market reaction is clear in stocks andCDS. The decline in banks’ CDS will beaccompanied by tighter short-term credit spreads.OIS/BOR spreads therefore have room to narrowmore significantly.Strategy: receive OIS/BOR spreads. On the Mar12,target 45bp (versus 58.5 currently).Patrick Jacq 27 October 2011Market Mover38www.GlobalMarkets.bnpparibas.com