Market Mover - BNP PARIBAS - Investment Services India

EMU Debt Monitor: Key RV ChartsThis section is classified as non-objective researchChart 5: 2y/5y OAT/Bund box: 5y OATs havestabilised on their cheapest levelsChart 6: OFR/OTR OBL ASW –Obl 161 back on the cheap side3025Oct 13 Bund cheap/OAT Apr 16 cheapSMP 2.0131192071553105OAT Apr 16 expensiveBTAN 5y cheapening1-10Apr-11 Jun-11 Aug-11 Oct-11 Dec-11OAT/Bund Oct 13/Apr 165y French papers have stabilised at their cheapest levelswithin the 2y/5y OAT/Bund box for a few days. Those whoconsider the recommended 2y/10y OAT as too risky couldplay flatteners through the OAT Oct 13/Apr 16 spread.Chart 7: 10y/30y DSL/OAT box back to its widest levels-31 16 31 46 61 76 91 106 121 136 151 166 181 196Av 5 OFR/OTR asw obl 159/160 obl 158/159obl 157/158 obl 156/157 obl 155/156obl 160/161If the past is any guide, Obl 161 seems to be trading atcheap levels vs. Obl 160 in ASW terms around 3.5bp (roll13bp). In contrast, Obl 159 recently richened on the Oblcurve. We advise holders of Obl 159 to switch into Obl 161.Chart 8: 10y/15y Fin/DSL: 15y Fin is normalising504540OAT Apr 20 / DSL 42 expensive1510FIN July 25 expensive353052502015-5105OAT Apr 20/DSL 42 cheap0May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11DSL July 20/OAT Apr 20/Jan 42/OAT Apr 41After a brief setback due to the cheapening of 10y OATs, the10y/30y DSL/OAT box finally retraced close to its widestlevels (i.e. 30y DSL still too expensive). A safe way to play a‘normalisation’ is to enter 5y/30y DSL stepeeners.Chart 9: France/Netherlands CDS & 5y BTAN/Oblspread diverging-10FIN July 25 cheap-15Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Fin Apr 20/July 20/July 25/ DSL Jan 28Last week we highlighted the extreme cheapness of 15y Finvs. DSL. The former has started to recover but remains verycheap with the 10y/15y box, still trading 10bp from itshistorical average. Fin July 15 is still a buy on the 15y area.Chart 10: 10y/15y/30y Bund fly: massive 15y Bundcheapening since mid-September1605Y CDS and cash spreads0.750.715y Bund cheapening1400.651200.61000.5580600.50.450.4400.35200Apr-11 May-11 Jun-11 Jun-11 Jul-11 Aug-11 Sep-11 Sep-11 Oct-11BEL/FRA BEL/FRA cash FRA/NETH FRA/NETH cashAs Chart 9 shows, the France/Netherlands CDS differentialhas decoupled from the cash spread. The sharp divergencein CDS basis is unsustainable and a normalisation will lead toFrance CDS richening versus the cash (the OAT supply nextweek argues for a tighter France CDS basis).All charts source: BNP Paribas0.3Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11DBR 2.50 01/21DBR 5.625 1/28 DBR 3.25 07/42 FLYDBR 2.50 01/21 DBR 6.5 7/27 DBR 3.25 07/42 FLYEven though the 10y/30y Bund segment has almost fullynormalised, most of the move has come from the 15y/30ysegment, which pushed 15y Bunds back to very cheap levelsin the 10y/15y/25y Bund fly. The most conservative tradewould be for holders of 10y Bund to switch into Jan 2024.Eric Oynoyan / Ioannis Sokos 27 October 2011Market Mover41www.GlobalMarkets.bnpparibas.com