Market Mover - BNP PARIBAS - Investment Services India

EMU Debt Monitor: Trade IdeasThis section is classified as non-objective research• Play 5y/10y Bono flatteners• Olo 2y/5y flatteners are still attractive.• Buy Bono July 40 versus BTP Sep 40 / sellBono Apr 21 versus Bono July 266040Chart 1: Short-Lived Normalisation of 2y/10yBono versus BTP SegmentBono 2013 expensive20Relative value switches updateFollowing the EU summit announcement, we providea quick update on recent non-core relative valuerecommendations.3y/10y Bono flattenersIn early September we stressed the excessivesteepening of the Bono 2y/10y segment comparedwith the BTP one, underscored by the very high levelof the 2y/10y Bono/BTP box at around 50bp. Werecommended selling the expensive 3y Bono (i.e.Oct 14) versus 10y, expecting around 25bpflattening. As Chart 1 illustrates, the Bono segmentflattened by more than 20bp until recent days, as thebox fully normalised before rewidening. Theexpensive Bono Oct 14 also disinverted by 10bpversus Apr 14.What about now? Actually, the pullback on the Bonocurve in recent days has been particularlypronounced on the 2016/2020 segment as Oct 16richened versus Apr 16 (see Chart 2). Meanwhile,the Oct 20/Apr 21 spread has been flattening formore than a month. Such micro moves on OFR/OTR5y and 10y Bonos led to new highs on the Bono Oct16/Oct 20 segment, while the BTP one has beenfairly unchanged. Very tight repo conditions on BonoOct 16 incline us to be more conservative on theentry level to take into account the additional carry ona two to three week horizon. Moreover, the nextBono supply will be on Bono Oct 16 next Thursday,which should reverse the recent richening move andimprove repo conditions.Strategy: enter flatteners on Bono Oct 16/BonoOct 20 segment on a further overshooting to the69/71bp area, expecting a return to low 50s.2y/5y olo flattenersIn early October, we underscored the extremevaluation reached by 2y olos within 2y/10y olo boxesversus AAA and pushed for Sep 13/Sep 16 oloflatteners.0-20SMP 2.0-40Jan-10 Mar-10 Jun-10 Sep-10 Nov-10 Feb-11 May-11 Jul-11 Oct-11Bono/BTP 2013/20 boxSource: BNP ParibasChart 2: Bono Oct 16/Sep 20 Segment: BonoOct 16 Richened versus Both OFR 5y and 10y0.70.60.50.40.30.20.10-0.1-0.2Sep-11 Sep-11 Oct-11 Oct-11Source: BNP Paribas3020100-10-20-30Bono Oct 16 ASW richeningBTPS 4.00 09/20 BTPS 4.75 09/16SPGB 4.85 10/20 SPGB 4.25 10/16SPGB 4.25 10/16 ASW SPGB 3.25 04/16 ASW (RHS)Chart 3: Olo/ATS 2y/5y Box: 2y Olo StillExpensiveHistorical Average + 2.0 st devHistorical Average - 2.0 st devOLO 2013-40Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Source: BNP ParibasOlo Sep 13/Oct 13/Mar 17/Feb 17OLO 2013 toocheapThe Sep 13/Sep 16 olo spread is a few basis pointssteeper from where we recommended it but we donot see reasons to question that flattening call for thetime being. Indeed, while the 2y/10y olo/AAA box25201510502013 OloricheningEric Oynoyan / Ioannis Sokos 27 October 2011Market Mover42www.GlobalMarkets.bnpparibas.com