Market Mover - BNP PARIBAS - Investment Services India

This section is classified as non-objective researchstarted to normalise, 2y/5y ones versus AAA curveslike ATS or BTANs are still hovering at their lows, i.e.2y olos too rich (see Charts 3 and 4). Moreover,within the local curve the 2y/5y/10y olo fly is trading10/12bp above its fair value, i.e. 5y olo too cheap(the fly went up to 20bp+ too high ten days ago).Keep in mind that in mid-September the belly of theolo curve traded up to 35bp too expensive.Strategy: Enter or keep Sep 13/Sep 16 olo spread(monthly carry 2.5bp for one month). Thesegment should flatten back to the mid 90s.10y/30y Bono segmentAt the very long end of the non-curves, most of 30ymaturities recovered versus the 10y maturity after aninitial spike after the start of the SMP 2.0. However,the flattening of the 10y/30y segment has been muchmore pronounced on BTPs than Bonos. As Chart 5highlights, that lag on the Bono segment has pushedthe 10y/30y Bono/BTP box to new highs. Anotherindicator of the cheapness of the very long end of thebono curve is the differential between the observedand the fitted spread. The times series of the residualis plotted on Chart 6. The differential is around +20bpcompared with -12bp for the BTP curve.Strategy: we would recommend two kinds oftrades. The aggressive one would be to buy BonoJuly 40 versus BTP Sep 40. With thenormalisation of the 30y Bono and BTP, thespread in the low 50s should widen to the high70s.For the most conservative ones, the alternativetrade would be to sell Bono Apr 21 into BonoJuly 26, targeting a return to the low 40s.Chart 4: Olo/Btan 2y/5y box: 2y Olo Cheapened aBit But Remains Expensive155-5-15-25Historical Average + 2.0 st dev-35OLO 2013 expensive-45Historical Average - 2.0 st dev2013 Olo richening-55Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11Source: BNP ParibasOlo Sep 13/Oct 13/Mar 17/Apr 17OLO 2013 too cheapChart 5: 10y/30y Bono/BTP Box: Bono SegmentToo Steep20100-10-20-30-40Bono 10y/30y too steepBono 10y/30y too flat-50Jan-10 Mar-10 Jun-10 Sep-10 Nov-10 Feb-11 May-11 Jul-11 Oct-11Source: BNP ParibasBono/BTP 2020/2040 boxChart 6: Observed versus Fitted Bono 10y/30ySegment: 30y Normalising But Still Cheap5545Bono 10y tooexpensive3525155-5-15-25SMP2.0-35May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11Source: BNP ParibasJul 2019/Jul 40 Bono spreadEric Oynoyan / Ioannis Sokos 27 October 2011Market Mover43www.GlobalMarkets.bnpparibas.com