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11 May 2012
Harvinder Sian Senior European Rates Strategist +44 20 7085 6539 harvinder.sian@rbs.com
Par Magnusson Chief Analyst Scandinavian Rates Strategy +46 8 506 198 79 par.magnusson@rbs.com
Euro Area Strategy (p7): Remain bullish core rates for instance still in 3F1Y and at the long end. FRA/OIS basis expected to drift wider but prefer via cheap 1x1 puts in front Euribor or forward basis spreads. The rally to new yield lows in Bunds is not done. Target 10y at 1.25%. 10s30s has flattened back to normal valuations. There is some risk of CVA and Danish long buying. We still like fwd steepeners, with 20y a sweet spot. New Greek elections likely and the hope is disaffected voters back pro-bailout parties. If not, Euro exit risks rise. Absent a pro-Euro response, opening up of exit risk means deposit risk across periphery. Spains bad bank plan: The headline provisions are more realistic but will still be revised higher in our view which is a risk given market conditions. We do not think this plan is enough around the crisis for SPGBs. UK Strategy (p31): 10s30s is too steep, and is tempting; but for now this remains a bear trade, 78% correlated to 10y. We look for the BoE Inflation Report on Wednesday to signal that the MPC has made a small move towards a more neutral bias, but this is discounted. Scandinavian Strategy (p34): The Riksbank prepares for financial war as it establishes a framework for QE and LTRO. Macro data are deplorable in Sweden, so the road to more aggressive monetary policy is paved. We move your profit target levels. Inflation-Linked Strategy (p38): Euro Area fundamentals suggest sticky inflation and a tight supply side. I argue to use the recent steepening to put on breakeven flatteners in 5s30s. In UK RPI, expect directionality in level and curve to remain until we break at least 10bp higher in real yield. The IL62s syndication makes me less positive on the ultra-longs. Volatility Strategy (p 44): Euro Area and GBP volatilities have been very well bid, particularly in the top left in GBP and top-right in EUR. Scope for instability over the coming months is high and I would expect that disaster protection will keep volatility relatively supported. Futures & Options Strategy (p49): Fade the sell-off in front Euribors. Consider EUR 2s10s or 5s30s flatteners. For Short Sterling, prefer high delta put structures in greens vs. selling 99.00-plus calls. Technical Strategy (p56): Bunds have reached the 142.85 target, but displayed signals of possible short-term correction before continuing to move higher. A similar picture is Sweden. EMU Issuance Update (p57): Weekly bond flows (p63), Auction Calendar (p64), Coupon & Redemption (p65), Portfolio of Trade Ideas (p66), Macro forecasts (p71)
Important disclosures can be found on the last page of this publication.
Giles Gale European Rates Research +44 207 085 5917 giles.gale@rbs.com
Claire Tucker European Rates Research +44 207 085 8480 claire.tucker@rbs.com
www.rbsm.com/strategy
Yet again, the market is causing most pain where it can there is enough evidence to suck in bond bears for a day, but the overriding theme is still lower yields (for the record, even with that blowout +8bp day, 10y Gilts rallied net -5bp in the past week). It is dangerous being short any safe haven product given Europe is hastening now to its conclusion. My website of the week: www.thecurrencycollector.com For a great look at how money circulates on a currency exit, click on stamps on notes Is this just about EMU? Not only. Some other very bullish pointers for you before we even start on the biggest theme in Europe deposit flight which will soon be everyones top theme. 1) Sweden this week followed through on end-April proposals to set up a Swedish govt bond portfolio, readying itself for QE if it needs to do so. An SEK10bn fund is not going to excite anyone, and this is just about increasing the available tools to the Riksbank, but the signal it sends is powerful. Well, it is to us - the reaction we were fed back with was old news (it had been suggested on 27 April). Yet 10-yr Sweden has this week moved back below 10-yr Germany for the first time since February. Do read Par Magnussons piece where he discusses the portfolio in detail. UK construction data was revised from -3% to -4.8%, which cuts GDP by an extra -0.14%, which means a revision down in UK Q1 GDP at next print from -0.2% to at least -0.3%. Japan is not on everyones radar screens. We suspect this is partly because yields have been so low for so long that there has been an unwillingness to invest. I remember an old boss, 10 years ago, making the point that global investors had been underweight JGBs in their global govt portfolios for 15 years. Well, not much has changed. Being short JGBs has been a more popular trade in Q4 2011 with growing fears about lack of household sponsorship I certainly had numerous conversations about it in November/December. I can see the reasons why Japan is inevitably a terrible credit in a few years time, but I would not consider that a trade for now. We have just updated our RBS sovereign risk index (which takes into account total debt levels, rule of law, bank assets, loan to deposit ratios, etc), and Japan is now the worst credit in the developed world. Last time published in the year ahead - it was 2nd worst, after Greece. But the idea they sell-off now misses the large corporate surpluses which can and will be put to work, or the policy flexibility to keep JGB yields low (ie, it becomes a yen trade, not an FI trade we will return to this in a year or perhaps longer). Anyway, the point is that all the payer swaptions were entered at 1-1.1% on 10y JGB equivalent, and Japan is showing one of the worlds most violent bond rallies. This is an absolute value world, do not be short any safe havens.
2)
3)
On that subject, read an ECB paper in the monthly bulletin which compares Europe to Japan. My new catchword is Japanification (of Europe). See Giles Gales volatility articles for more (especially last weeks). 1y forwards have converged from 20yrs onwards, but EMU forwards sit substantially higher than Japan further up the curve (eg 1y10f in EMU is 3.06%, over 100bp above the 2.01% in Japan). In my view, another strong support for longs in bunds at 5-10yr sector.
Gross debt/GDP ratio: EMU is following the identical path to Japan. US and EMU have some optimistic forecasts
. . . and Japan started with a far better primary balance than EMU (& US)
Source: IMF Word Economic Outlook, October 2011; RBS; ECB Monthly bulletin
Source: IMF Word Economic Outlook, October 2011; RBS; ECB monthly bulletin
Leaving aside the interesting charts above, which show that Japan did not start its recession/deleveraging period with terrible numbers, it was the ongoing lack of credit creation, and devastating cut to trend GDP that had such long lasting corrosive effect. One of my big themes some years ago was that trend GDP in Japan had moved from 4.1% in 1990 to sub 1% by the mid 2000s. This is a primary support for much lower structural bond yields in developed majors trend GDP is on its way down once you overlay deleveraging and demographics, the 2 overriding themes in my opinion. The below chart shows how the US is going some way to getting through its deleveraging (well, only in a private sector sense), but EMU has done nothing.
House prices. Adjustments can take a long time
Source: RBS; ECB monthly bulletin; S&P; Fiserv; MacroMarkets LLC; Japan Real Estate Research Institute
We apologise if this does not seem very weekly, but it is absolutely relevant as your big overarching theme. And it goes a long way to explaining why bonds are not rich right now. Sure, they may be close to the rich end of our fair value models for bunds and Gilts, but I would not describe them as over-expensive. It just requires an adoption of the concept of JAPANIFICATION to see that perhaps rates stay long forever (it was only a month ago that many were seeing early Fed & MPC exits etc), and term premia are too high along the curve out to 10 years.
Back to Europe I introduced last weeks overview with the following view on Greece Greeces elections are woefully under focused on, a no result/weak majority is very possible, we are sceptical of the idea that PASOK/ND are an easy done deal (in financial market estimate terms), and suspect that immediate talk come the week ahead will be about exit & renegotiations. Why was Greece so underdiscussed? This past week has suddenly seen all those telling us that Greece was a one-off with no effect on anything else (well, 10yr Spain is net +28bp on the week) being replaced with the media now starting to talk about the most relevant point as far as I can see it: if a country exits, you have a blueprint, and it risks a bushfire across some European countries. Why? Whether you believe or not that any other country will follow the path that Greece is about to tread (I personally believe they will, but have never wanted to be seen as stoking the fire of the crisis by writing such over the past two years), the prospect of the private sector removing their deposits risks making events self-fulfilling. We suspect many will start discussing Argentina a lot more in coming weeks. Harvinder Sian and Biagio Lapolla write about it at length in this document. Remember that under exits from currency unions, you will not necessarily leave all your debts in other currencies could Hellenic Telecom be paid in new drachmas but have its debt still in euros? which is why Argentina, with its dollarized economy (90% of its mortgages were in USD), just passed a law converting everything to pesos. Once you take this on board, you realise that the key numbers to be following are bank deposit data, which we have been discussing in every meeting for some months. It is not falling off dramatically yet in Italy, but it is doing so in Spain. We have a responsibility not to be overly aggressive in this debate, which we hope you will feel we have not been, and there are many sensitive parties out there, but we have finally reached the point at which a sensible debate can start, about the economic viability of certain countries membership of EMU. I focus on total debt all the time. For me, we are in a debt deleveraging world, and it is ludicrous to just look at government debt. I do not understand why the market concentrates on just government debt. For starters, as Spain showed last week, and everyone did in 2008, bank debts can quickly become government debts! As can household & corporate debts if you turn into recession and bad debts start to rise etc.
Total Debt: Greece is a big winner. Major implications for the economy post-EMU . . .
As such, the chart above is a favourite in my presentation. Greece is actually a net winner, once you take off the cloud hanging over the country of its un-surmountable government debt mountain. This has major implications for risky asset performance there once they leave the currency zone. This also, sadly, has implications for those who wrongly see Greece as a one-off.
2012 real GDP, change in forecast from Autumn 2011 to May 2012. Spainand EMU
1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 Hungary Lithuania United Kingdom Netherlands Slovakia Romania Luxembourg Euro area Germany Denmark Czech Republic Slovenia Finland Malta Japan China Latvia Portugal Bulgaria Austria Croatia Sweden Belgium Estonia Cyprus Poland France Ireland Greece Spain USA Italy
If global growth were to take off, my theme here would be less powerful. But we are still in a woeful growth environment across EMU (see the growth chart above, still falling, momentum is downward, not upward), debt is being paid down, and we still hold a E5trn forecast cut to total European bank assets. Total debt is without any question going to haunt many economies and Spains total debt is 100% greater than that of Greece. (As an aside, if of interest, the USA does exceedingly well in this regard, total debt is <300%, other winners are Canada and Australia, both at the same level as the USA). This is the essence, for me, of why I do not agree with the idea that Greece is a one-off. Low and weakening growth + high debt levels = continuing upgrades for expected write-downs (such as the E98bn we see for further Spanish bank write-downs under our credit specialist, Alberto Gallos, adverse scenario). One last point. In the week ahead the Eco-fin may ease the fiscal adjustment process, and there is much chat about whether this makes the periphery short trade less solid, since it does throw the sovereigns a life-line? No. The key point is that this is happening in response to some terrible growth forecast revisions, visible in the chart above. Spain is in the unenviable position of having had its 2012 GDP forecast cut by 0.8% even from the last update in February. Harvinder Sian is expressing this via short 10-yr Spain.
Aug-10
Dec-10
Feb-11
Oct-10
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
Source: RBS
Source: RBS
There are various ways that this could be corrected to arrive at a fair value calculation such as removing the weaker banks and concentrating on only the Prime banks that are the focus of the Euribor question on the lending rate to other Prime banks. The chart below shows a model using the above banks CDS index and the YoY% rise in the ECB balance sheet. The inference is that FRA/OIS risks are still to the upside and that there is cheap optionality in forward basis spreads such as 2y2y and even further out. Alternatively, buy the ERU2 99.25/99.125.
bp
3x6 FRA/OIS
Fitted
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Source: RBS
2011
2012
2013
Risk premium is 5y5y minus moving average of nominal GDP, all minus the historic average
May-74
Sep-81
Jan-89
May-96
Sep-03
Jan-11
Source: RBS
Aug-77
Apr-84
Dec-90
Aug-97
Apr-04
Dec-10
Source: RBS
Source: RBS
New Trade: Receive EUR 18m forward starting of the 7y tenor versus paying EUR 3F 2y from current -26bp to target -11bp. Place stop loss at -32bp. The carry and roll is negative by 1 bp per month.
Long end swaps reach new lows: will there be an ALM push
The all time low in swaps is causing some concern that forced buying at the long end of the curve may be seen by ALM. This has been partly behind the recent flattening in 10s30s swaps though fast money exiting steepeners has also been very prominent.
Long end swap rates have hit new lows
5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 May-07 Feb-08 Nov-08 Aug-09 May-10 Feb-11 Nov-11
Source: RBS
30y swap
40 35 30 25 20 15 10 5 0 2.20
bp
R = 0.0223
The correlation of the 10s30s slope to 30y levels has been modest in recent years. Our preferred valuation metric is given below where we regress the slope on front end levels, vols and also EUR-JPY long dated forward spreads as rate levels approaching JPY forwards have tended to see lower buying activity and have even generated regulatory shifts. The valuation in the charts below show the recent flattening has corrected the excess steepness.
EUR 10s30s versus fitted level
80 60 40 20 0 -20 -40 -60 -80 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Source: RBS
bp
Actual
bp
Error
Going forward, a risk is that ALM or other forced buyers come to buy long end rates. One such flow that has been an influence are CVA desks. This risk still exists but is blunted by a couple of factors. Firstly, many banks have re-struck collateral documentation with sovereigns in recognition of the more risky environment and so the total receiver demand risk has been blunted. Second, the CDS level of Spain is at new highs but the need for CVA desks to hedge this risk is limited owing to the low swaps activity of the Tesoro in the past. Italy CDS is below the peak by some 140bp. Crucially, however, the size of the potential CVA flow is unknown and is likely to continue working against sharp steepening. We do not expect Dutch ALM to be active any time soon. The pension and regulatory system are evolving and there is little appetite to Receive long end rates at these levels and even a feeling that the forced buying of 2008/09 must be avoided. Mercer Consulting even went so far this week as to advise its clients to look for strategic paying opportunities. Danish buying flows may be seen given that the regulatory Traffic Light tests stress down 100bp in rates and some funds are not as well covered in duration terms (given convexity effects) as previously thought. At the same time, the solvency of the sector is not at critical levels so the level of activity on this theme is expected to be sporadic rather than a persistent buying flow. EUR 10s30s can flatten further from here but we are not expecting an aggressive move lower like Q4-11. We continue to prefer forward steepeners such as 10y forward starting EUR 10s30s and EUR 5s10s30s in forwards as Solvency II makes the 20y progressively more important and rates beyond the last liquid point (30y) much more irrelevant for ALM.
Sovereign Strategy
Harvinder Sian Biagio Lapolla The volatility and higher spreads that we expect come from two sources. Firstly, the Greece Euro exit risk and secondly, the prospect that the ESM will subordinate SPGB and BTPs will see these markets have more self-fulfilling crisis features. New Greek elections are likely and the hope is that disaffected voters come back to pro-bailout parties. If not, then Euro exit risks rise as Europe can not offer a gift sizeable enough to bribe Greek voters to stay the course. This means, on another hung parliament, that Greek government IOUs could trade as proxy currency as early as July. If this does not galvanise a large pro-euro vote intention into accepting Troika demands the actual exit looms. Opening up the Pandoras box of exit means deposit risk across the periphery. The future of the euro would then be dictated by the subsequent policy response. Spains new bad bank plan: We assess the news and the risks for SPGBs. The overall headline provisions are more realistic but will still be revised higher in our view which is a risk given that market conditions are not benign. We think that the provisions for small banks means more private to public sector risk transfer and this will also be necessary to make the bad bank plan work. Ultimately, we do not think this plan is enough around the crisis for SPGBs.
The tables to the right present a rich-cheap heatmap, based on 100d history Z-scores. Each point in the matrix shows the Z-Score for a given market spread. A positive number means the countries on the column header is trading Cheap (or Steep, in the case of slope spreads) versus the country on the row header. The numbers on the main diagonal are simply the z-score of a single market. For instance, the -1.12 number in the first cell of the EGB 2y matrix says that RAGB 2y are trading 1.21 standard deviations below their 100d average. We have not added Greece to the study to avoid distortions in the analysis.
EGB 5y
ATS BEF FIM FRF DEM IEP ITL NLG PTE ESP 5 ATS 1.47 0.64 0.37 1.53 0.59 0.62 0.31 0.71 1.15 2.13 BEF 0.64 1.16 0.53 1.04 0.62 1.05 0.71 0.70 1.11 2.05 FIM 0.37 0.53 2.24 0.81 0.90 0.43 0.16 1.04 1.16 2.04 FRF 1.53 1.04 0.81 1.24 0.13 0.31 0.00 0.02 1.20 2.12 DEM IEP ITL 0.59 0.62 0.62 1.05 0.90 0.43 0.13 0.31 2.20 0.29 0.29 0.02 0.03 0.63 0.35 0.26 1.18 1.34 1.90 0.89 NLG 0.31 0.71 0.71 0.70 0.16 1.04 0.00 0.02 0.03 0.35 0.63 0.26 0.31 0.01 0.01 2.51 1.16 1.17 1.41 2.10 PTE ESP 1.15 2.13 1.11 2.05 1.16 2.04 1.20 2.12 1.18 1.90 1.34 0.89 1.16 1.41 1.17 2.10 1.26 1.40 1.40 1.66
EGB 10y
10 ATS BEF FIM FRF DEM IEP ITL NLG PTE ESP ATS 1.85 0.20 0.56 1.52 0.36 0.48 0.50 0.73 1.37 2.20 BEF 0.20 1.23 0.44 1.00 0.32 0.89 0.80 0.54 1.32 2.04 FIM 0.56 0.44 2.24 0.54 1.02 0.20 0.26 0.82 1.36 2.00 FRF 1.52 1.00 0.54 1.39 0.72 0.04 0.15 0.25 1.41 2.24 DEM 0.36 0.32 1.02 0.72 2.37 0.27 0.31 1.16 1.35 2.02 IEP ITL 0.48 0.89 0.20 0.04 0.27 0.33 0.23 0.11 1.49 1.21 0.50 0.80 0.26 0.15 0.31 0.23 0.19 0.18 1.40 1.15 NLG 0.73 0.54 0.82 0.25 1.16 0.11 0.18 2.32 1.36 2.05 PTE ESP 1.37 2.20 1.32 2.04 1.36 2.00 1.41 2.24 1.35 2.02 1.49 1.21 1.40 1.15 1.36 2.05 1.50 1.65 1.65 1.67
EGB 2s5s
25 ATS BEF FIM FRF DEM IEP ITL NLG PTE ESP ATS BEF FIM 1.36 1.37 1.37 1.00 0.76 1.03 1.21 1.05 0.44 1.48 0.78 0.34 0.70 0.68 0.26 1.27 0.81 0.40 0.58 0.30 FRF 0.76 1.03 0.76 0.10 2.24 0.67 0.46 0.72 0.72 0.40 1.21 1.05 0.10 0.53 1.21 0.64 0.40 0.52 0.68 0.38 DEM IEP ITL 0.44 0.78 1.48 0.34 2.24 0.67 1.21 0.64 2.21 0.87 0.87 0.62 0.93 0.57 1.46 0.78 0.85 0.18 0.73 0.55 0.70 0.68 0.46 0.40 0.93 0.57 0.29 0.68 0.55 0.17 NLG PTE ESP 0.26 0.81 0.58 1.27 0.40 0.30 0.72 0.72 0.40 0.52 0.68 0.38 1.46 0.85 0.73 0.78 0.18 0.55 0.68 0.55 0.17 1.61 0.74 0.57 0.74 0.63 0.42 0.57 0.42 0.31
EGB 5s10s
510 ATS BEF FIM FRF DEM IEP ITL NLG PTE ESP ATS BEF 0.25 0.93 0.93 0.86 0.30 0.69 0.07 0.86 0.63 1.25 0.72 1.10 0.57 0.01 0.32 1.05 0.79 0.74 1.45 1.83 FIM 0.30 0.69 0.79 0.44 1.33 0.78 0.37 1.00 0.80 1.64 FRF 0.07 0.86 0.44 0.64 1.34 0.63 0.52 0.66 0.81 1.58 DEM 0.63 1.25 1.33 1.34 1.69 0.27 0.99 0.98 0.88 1.17 IEP ITL 0.72 1.10 0.78 0.63 0.27 0.43 1.08 0.47 1.02 0.19 NLG PTE ESP 0.32 0.79 1.45 1.05 0.74 1.83 1.00 0.80 1.64 0.66 0.81 1.58 0.98 0.88 1.17 0.47 1.02 0.19 0.81 0.70 2.03 0.01 0.83 1.78 0.83 0.84 0.95 1.78 0.95 1.39
Source: RBS
0.57 0.01 0.37 0.52 0.99 1.08 0.66 0.81 0.70 2.03
Key events with some comments on influence for markets where appropriate
Date
13-May
Country
Germany
Event
German regional election in North Rhine-Westphalia Eurogroup/ECOFIN meeting Redemption of foreign law bonds Francois Hollande inaugurated as French president President appoints caretaker govt if coalition absent Greek redemption 5.25% May 2012 GGB E3.334bln G-8 summit EU leaders summit on growth compact German final vote on ESM & fiscal pact EU Head of State Summit Deadline for Spanish bank to submit recap plans
Notes
Will be assessed for implications on the German Federal election in Sep-13. NRW losses for the SPD precipitated the fall of the last SPD/Green government and while this is possible for the CDU/FDP, it remains an outside risk. May 15 due date for 435.9m foreign-law bond; redemption has 15-day grace period Francois Hollande meets German Chancellor Angela Merkel in Berlin for the first time since his election
14/15May EMU 15-May 15-May 16-May 18-May Greece Fra/Ger Greece Greece
Interest in IMF funding for Europe. The Heads of State summit will review EMU budget plans, rubber stamp plans to expand the EIB, deploy stability pact funds and attempt a compromise on EMU fiscal targets Tentatively planed for 25 May. Expected to finalise support for the firewalls. Polling suggests this will pass, but at this stage it is unknown precisely what the fiscal compact will be, given especially French demands. The polling however suggests that the No campaign is making up ground and there are large amounts of undecided votes. Note that this date may be changed and that if it is No access to the bailout facilities could be problematic. http://ec.europa.eu/internal_market/bank/docs/shadow/green-paper_en.pdf Up to 4-notch downgrades possible and while markets will eventually adjust the ratings related mandates mean some fallout expected. The delay in the Moodys report could be more protracted.
31-May
Ireland
EC Presents Draft Rules on Shadow Banking Euro area deadline for bank recaps Moodys ratings reviews on banks Earliest date for new Greek elections (most likely on June 17) France to Hold Legislative Election (1st Round) Eurogroup meeting Leaders of G20 gather for a summit IMF reviews for Portugal/Ireland France to Hold Legislative Election (2nd Round) Head of State Summit The EC will issue country specific recommendation on their budget and reform plans Eurogroup meeting Eco-Fin Meeting EU leaders summit Deadline for banks for 9% Tier 1 Capital Ratio Audit of pubic finances
French Legislative Election. All 577 member seats in the assembly including overseas possessions go to election. In Mexico. Ireland widely expected to be on track but with more budget cutbacks needed. Portugal largely on track but more remedial measures also likely. French Legislative Election. All 577 member seats in the assembly including overseas possessions go to election.
Jun/Jul
Greece
IMF review
01-Jul
EMU
France's public audit office, finishes a "special audit" of public accounts. We expect deficits to be revised higher and test whether budget targets which in turn are likely to be contingent on the economic outlook. Weakness here may see any Hollande pursue a more Keynesian agenda. Greece expected to miss targets and remedial measures will be demanded which we expect to be problematic for the new Parliament, but some scope to view Sep review as more important. Firewall headline likely to be near 1trn total (with EFSF & IMF) = sounds like a bazooka. It is dangerous, in our view, because (1) politicians will take more risks with Greece in belief a firewall works (2) firewall subordinates periphery debt. The probability of default does not fall far enough to mitigate lower recovery because there is not enough money to carry Spain & Italy through an economic cycle, and other normal shocks. Risk-on initially (on idea of bazooka) then ESM to drag yields higher, as the ECB steps back.
BTP bond redemption for E17.06bln Bond redemption for E12.9bln CAC documented bonds will be issued for all EGB >1y The EMU govt bond CAC project is found on http://europa.eu/efc/sub_committee/cac/cac_2012/index_en.htm
Source: MarketNews, Reuters, Bloomberg, RBS
In other words, any compromise coalition while likely to be welcomed near term is likely to unravel as the full scale of the austerity programme demands comes clear with 11.5bn in new austerity measures needed as the first policy action. (The details of the MoU are presented on the next page.) Equally, Greece may simply move to new elections, most likely on 17 June or perhaps as early as 10 June. A short-lived coalition or new election should not be a surprise. After all, and as the election results below show, the bulk of the population voted against the austerity programme which is hardly a surprise five years into a recession that is verging on depression, with an unemployment rate of 21.7% in February 2012.
Greek election result, % of vote
Democratic left, 6.1 Golden Dawn, 7.0 New Democracy , 18.9
Independent Greek, 33
It is particularly perturbing that unemployment is 53.8% for those aged below 24 years and a still a very high 29.1% for those between 25-34 years. It is these age cohorts that historically tend to be antagonists for change.
Unemployment rate by age cohort (February 2012)
60 50 40 29.1 30 20 10 0 15-24 years old 25-34 35-44 45-54 55-64 17.6 16.2 11.2 % 53.8 Feb-2012
Moreover, the MoU outlines plans to cut an extra 150,000 staff from the general government sector. This compares to a total employment level of 664,223 persons (as at November 2011), and so represents a total cut of 23%. While this is a necessary condition for Greek solvency, it also means that highest political hurdles are yet to come if the MoU is to be followed, especially given the post military-rule history of Greek parties buying votes with public sector largesse. Put simply, the disenfranchisement of large elements of the population to the Troika and, we suspect, eventually to the Euro is not accidental.
Prior to first disbursement of the new programme, the government is to adopt the following measures, according to the latest MoU:
Reduction in pharmaceutical expenditure by at least 1.076bn in 2012. Reduction in overtime pay for doctors in hospitals by at least 50m. Reduction in the procurement of military material by 300m (cash and deliveries). Reduction by 10% in the remuneration of elected and related staff at the local level and reduction in the number of deputy mayors and associated staff in 2013 with the aim of saving at least 9m in 2012 and 28m in 2013 and onwards. Reduction in the central government's operational expenditure and election-related spending by at least 370m (compared to the 2012 budget), of which at least 100m is to come from military-related operational expenditure, and at least 70m from electoral spending. Reduction in operational expenditure by local government with the aim of saving at least 50m. Frontloading cuts in subsidies to residents in remote areas, and cuts in grants to several entities supervised by the several ministries, with the aim of reducing expenditure in 2012 by at least 190m. Reduction in the public investment budget of 400m. Changes in supplementary pension funds and pension funds with high average pensions or which receive high subsidies from the budget and cuts in other high pensions, with the aim of saving at least 450m (net after taking into account the impact on taxes and social contributions). Cuts in family allowances for high-income households, with the aim of saving 43m. Prior to the disbursement, the government also is to adopt the following pending acts: Ministerial Decisions for the implementation of the business tax (minimum levy on the self-employed) provided for in Article 31 of Law 3986/2011; Ministerial Decisions to complete the full implementation of the new wage grid in all the pertinent entities, and legislation on the modalities for the recovery of wages paid in excess from November 2011 on. By end-June 2012, the government is to legislate an average reduction by 12% in the so-called 'special wages' of the public sector, to which the new wage grid does not apply. This will apply from 1 July 2012 and deliver savings of at least 205m (net after taking into account the impact on taxes and social contributions).
Source: IMF, EC
The exit threat is credible, a priori We believe if there is a time in which core EMU may play the Greek exit card, it is when the ECB is backstopping banks and the ESM/EFSF/IMF firewall is in place. The latter is intended from July 2012. Given this, politicians may reason that contagion costs will be limited or at the least would be more inclined to take that gamble. Second, the ability of Greece to survive in the Euro, even on a larger debt relief, is limited in the absence of economic restructuring. Third, politicians have hinted at this threat before and the distrust is high enough to mean Greek bondholders get paid from an escrow account separate to other Greek bailout money. The main argument against core EMU exercising the exit threat is the contagion it poses to other periphery countries, something that we explore below. Note that this does not prevent the a priori threat of exit. The ex post action of core EMU will surely depend on the scale of the contagion to the rest of Europe, but there will be no easy choices here for the political elite as caving in to the fear of a Greek exit by offering Greece fiscal gifts will lead to huge moral hazard and a race to the bottom. If this were to be the case, then we would expect to hear about new bailout discussions which would involve more money for Greece.
In the chart on the next page, we outline various paths Greece may take; under the assumption of new elections (which are seen regardless of any near-term coalition deal). Our heavy bias is to an eventual exit of Greece from the Euro (90% risk in our view) but the exit risk for 2012 is path dependent on choices that are made, both by Greece and core EMU countries. One of key takeaways is the reflexive nature of the choices the Greek electorate and core EMU will make in response to market pressure and prior choices. The most straightforward case for Greece is that new elections are seen as a genuine Euro referendum and that disaffected voters flock back to ND and PASOK to actually implement the reforms. As the chart on the left shows, there is nothing in the polls that points that way. If the pain is taken, then this will be deemed a success, but Greece will still require a large debt relief in the future. If the austerity programme fails to be delivered or new elections produce another antibailout configuration, then we see risk markets selling off on fear of a Greek Euro exit. At this juncture, there are various options for core EMU. If core policymakers panic on market risks and perhaps general periphery deposit risk, and offer Greece a pass with effective fiscal transfers, then the situation is soothed near term but increases risk of a race to the bottom further out as incentives for reform elsewhere get destroyed. It is not easy to fix Greece this way without huge moral hazard. Conversely, if core EMU is either politically unable or unwilling to give over more resources to Greece, then we see risk of a Greek Euro exit rising more materially. This is likely to be accompanied by sharp contagion. If the crisis so far has been about removing debt risk from non-residents to domestic and official hands as risks become apparent, then the next stage of the crisis on Euro exit is more dangerous. At this stage there are two genies that need to be put back in the bottle. First, on Greece: If there is no payment to Greece then, given a primary deficit, the government is likely to issue IOUs akin to those seen in Argentina to pay pensions and other benefits. If this scares the population into pro-bailout policies then the process begins again. If there is no appeasement with the MoU, then matters are likely to move quickly to a new Greek currency involving lots of social and economic risk. Second, and for the rest of EMU, this will also be a defining moment. One avenue is the contagion will require a huge response from politicians to move forward with political and fiscal union that involves commitment to Euro-wide bank regulation, deposit insurance, and eventually Eurobonds. None of this can be done quickly, so in the interim, there will be uncertainty but also the need for the ECB to step in with huge system support. In this instance, given possible trauma in markets, the ESM may need a bank licence with the ECB. The stresses may also involve further balkanisation of the ECB balance sheet where financial risks become yet more domestic via use of ELAs though the NCBs. This does not have to mean break-up; but it does have parallels with the Russian currency break-up and, if most of the risk is between governments, then break-up costs are themselves more muted. Where do we think the crisis is heading? Our probability of 90% that Greece will exit is a medium-term assessment based on social risks from persistent and higher unemployment. The risk for 2012 is harder to pin down given the dimension of alternative paths outlined above but forced to put a number here, we assess 50%.
PASOK -2.4
7.1
New Democracy
-1.5
-5.0
0.0
5.0
10.0
Where will the Greek drama end? The schematic shows the broad contours of risks and developments in markets with subsequent policy maker reactions.
3rd elections
Success
Reforms enacted with GDP and employment eventually rising and deposits return to Greece.
Markets drop in Greece with large cross border contagion possibly including bankruns across the periphery
Greece issues government IOUs in paying state benefits with the idea that these can be money-good in Greece and eventually for Euro cash. Greece accuses EMU & Germany of trying to starve it into submission
Debt overhang still huge. A few years later another default is needed but this one cements Greeces place in the Euro given earlier reforms restore competitiveness and erode corruption. Core EMU panics. Wants a quick fix offers Greece fiscal gifts in the guise of a new bailout (Bailout 3.0). IMF still can not contribute.
Core EMU panics in response to the markets but can not coordinate a fiscal gift to Greece owing to domestic political risks.
EMU decides to stop payments to Greece based on concerns about precedent and helped by a ECB backstop for banks & fiscal firewalls.
Cross border contagion is large and with risks of bank runs in the periphery. Mervyn King: "Once a bank run has started, it is rational to join in.
Negotiations on a more orderly exit (e.g. a reverse ERM & free trade)
HAPPY UNION:
Crisis galvanises an aggressive political response via political & fiscal union, including wide deposit insurance. Vast ECB balance sheet expansion is necessary in the interim to prop up EMU.
Germany decides further mutualisation of risk can not occur (probably also eyeing political failure) so contagion impact (e.g. deposit outflow) can be compensated via local NCB based ELAs with oversight from Frankfurt. This would look like the Russian (CIS) currency break-up.
BALKANISATION (BREAKUP?):
Source: RBS
2013 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2014 Q2 Q3 Q4 Total
Q2
Jul-11
Dec-11
Source: RBS , ECB
The most risk averse elements of the deposit base tend to be non-domestic corporate or even domestics where often there is a bank or country ratings threshold to consider. In the case of Spain, the erosion of non financial corporate deposits is interesting already and we think that the risks on any actual serious Euro break up tension will point in the same direction.
Spanish non financial corporate deposits (YoY %)
25% 20% 15% 10% 5% 0% -5% -10% -15% Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11 Jan12
Source: RBS, ECB
Spain
It is possible for bank deposits risk to become a cross-border feature. It would be an analogue of BoE Governor Mervyn Kings remark that: "Once a bank run has started - it is rational to join in.
Summing up
We have been expecting Greek exit risk to rise. The austerity push is getting to a tipping point for the social and electoral fabric of the country. We are convinced that any new election will clearly be seen as a referendum on the Euro as core EMU countries will have no other way to impress upon Greece the need to stay the course. This may work but there is little basis to make that judgement at present. If the anti-austerity vote remains strong and in the absence of large fiscal gifts to Greece that 1) may not be politically feasible to deliver and 2) would encourage huge moral hazard then the risk of a Greek Euro exit in 2012 rises notably. A failure to make the bailout payments could see IOUs trade as proxy Greek currency as early as July. If these IOUs remain, because the electorate still is not willing to observe the reforms, then the exit will be cemented. Just how the rest of Europe reacts here will dictate no less than the future of the Euro. The ECB will have a role to play in propping up the system to a far larger degree than now, but it will be political decisions on integration or balkanisation that should be most closely watched. In terms of trades and given that the Greek exit risk has been part of our trading plan we stick to the themes and risk outlined in the last Rates Weekly and indeed much before that. Namely, remain limit long 10yr bunds (target 1.25% and perhaps below 1%), own 'lower for longer' (e.g. 1y3f) but also consider that the sweet spot can be 10yrs, while butterfly trades such as 5s10s30s in forward space are also excellent carry and performance vehicles. We expect the periphery crisis to take a turn for the worse and remain short Spain outright and France versus Bunds, with BTP flatteners and some other macro/RV switch ideas.
On 3 January 2002, President Duhalde the fifth president in three weeks confirmed the debt moratorium (as well as the intention to negotiate with private creditors) and announced the end of the convertibility regime. Three days later, Congress effectively replaced the convertibility regime with a dual exchange-rate system based on an official exchange rate of Arg$1.40 per US dollar for the public sector and most trade-related transactions (except luxury imports); all other transactions would take place at prevailing market rates. At the same time, the monthly deposit withdrawal limit was raised to 1,500 pesos (previous limit: Arg$1,000), coupled with a freezing of term-deposits. US dollar deposits would remain frozen until at least 2003. To dampen inflation pressure, prices of privatised utilities (gas, electricity, telephones and water) were frozen indefinitely. Congress approved an emergency law that severely curtailed creditors rights. USSR to the CIS Following the break up of the Soviet Union and despite the independence of many post-Soviet states, the money supply was still officially controlled by the new Central Bank of Russia (CBR), which took over the role of the old Soviet central bank (Gosbank). Gosbank branches in the other post-USSR countries (now the Commonwealth of Independent States) became 14 independent central banks. The old Soviet system was based on a dual monetary circuit: enterprises could convert Rubles in the bank into cash only for specified purposes chiefly the payment of wages, which were paid in cash. All inter-enterprise transactions were required to be in non-cash Rubles to facilitate central planning and control. This dual circuit continued in the post-soviet Ruble zone. The implication was that while the CBR had monopoly on cash Rubles, the other central banks could and did create non-cash Rubles. This institutional structure not only led to a competition for seigniorage among post-Soviet states but the non-Russian states also found that they could finance their trade deficits with Russia by issuing credit to local commercial banks, which could extend it to local importers, with the resulting Ruble credit balances ending up in the accounts of the CBR. The obvious flaw in this system was that credit creation was feasibly unlimited and created a free-rider problem, which eventually created much higher inflation that progressively saw the independent states abandon this monetary arrangement. The parallel with the Euro area is simply that if NCBs are allowed to extend local collateral rules and perhaps some form of ELA (to prop up local banking systems), then the freerider/inflationary risk will also be apparent. The CBR in July 1993 announced, without warning, that all Ruble notes printed between 1961 and 1992 would no longer be legal tender, leading to a crisis of Russians confidence in their monetary system. The behaviour of the second director of the CBR, Viktor Gerashchenko, led the Harvard economist Jeffrey Sachs to call him, famously, the worlds worst central banker. The Ruble fared little better outside Russia. The currency was subject to severe exchange-rate instability, and to repeated speculative attacks. Several post-Soviet governments rejected the occupation Ruble in early 1992 and introduced their own national currencies. Czechoslovakia During late 1992 and throughout January 1993, many Slovak firms and individuals transferred funds to Czech commercial banks in expectation of Slovak devaluation shortly after the political split. This was reflected in the apparent undervaluation of the Czech currency as the Czech exports to Slovakia rose 25% YoY at 1992 while Slovak exports to the Czech Republic increased by only 16%.
A consequence of this expectation of future devaluation of the Slovak currency was that Slovak importers sought to repay debts as soon as possible while Czech importers did exactly the opposite. All these developments led to a gradual outflow of currency from Slovakia to the Czech Republic. The central bank (SBCS) attempted to balance this outflow by credits to Slovak banks but this became increasingly difficult in December 1992 and January 1993. Thus, the Czech government and the CNB decided on 19 January 1993 to separate the currency. After secret negotiations with the Slovak side, the separation date was set as 8 February 1993, and the Czech-Slovak Monetary Union ceased to exist less than six weeks after it came to being. The separation was publicly announced on 2 February 1993. Starting from 3 February, all payments between the two republics stopped and border controls were increased to prevent transfers of cash from one country to the other. During the separation period between 4 and 7 February (Thursday through Sunday), the old Czechoslovak currency was exchanged for the new currencies. The new currencies became valid on 8 February 1993. Regular Czechoslovak banknotes were used temporarily in both republics and were distinguished by a paper stamp attached to the face of the banknote. The paper stamp is a common feature of new currency regimes.
Interim Slovakian Korun with control stamp, circulated until new notes could be printed
Source: The significance of stamps used in bank notes by A. Keller and J. Sandrock
The public was also encouraged to deposit cash in bank accounts prior to separation since a person could only exchange CSK4,000 in cash. Business owners were not subjected to this limit. Coins and small denomination notes (CSK10, 20 and 50 in the Czech Republic and CSK10 and 20 in Slovakia) were still used after the separation for several months. Nevertheless, such notes and coins only accounted for some 3% of currency in circulation each. On the other hand, notes of CSK 10, 20 and 50 accounted for some 45% of the total number of banknotes. The stamped banknotes were gradually replaced by new Czech and Slovak banknotes. This process was finished by the end of August 1993.
8.5bn GGBs (according to Moody's) and around 14bn other senior liabilities (our own estimates) remained with BFA. Bankia had total assets of 305.8bn at end 2011. Its loan book at the end of 2011 was 193bn. Retail mortgages accounted to 86bn whilst the real estate development and construction loans were 32bn. In its latest presentation from February 2012, BFA-Group stated that it needs to increase its capital by 3,055m to reach the minimum core capital ratio of 8% by end2012 and to also cover the additional capital cushion required by RDL 2/2012 (Royal Decree-Law 2/2012 on financial sector restructuring).
Banco Financiero y de Ahorros (BFA) 45.5% (plus option for another 2.9%)
Listed shares
54.5%
Bankia
Source: BFA, CNMV, Press Reports, Bloomberg, RBS
Institutions Involved Catalunya, Tarragona, Manresa Manlleu, Sabadell, Terrassa Espana, Duero Madrid, Bancaja, Laietana, Insular, Canarias, Avila, Segovia, La Rioja Galicia, Caixanova Murcia, Peneds, Sa Nostra, Granada Navarra, CajaSol, Guadalejara, General Canarias, Municipal de Burgos
Aid ( bn) 1.250 0.380 0.525 4.465 1.162 0.915 0.977 9.674
[1] These were subsequently converted into equity in September 2011, [2] Will be converted into equity
(b) Recapitalisation These are the more recent activities of FROB following the EBA capital stress-test done in October 2011. So far and in addition to the support provided above, FROB has provided an additional 4.183bn in ordinary share injections to Caixa Catalunya (1.718bn) and NovacaixaGalicia (2.2465bn). This is in addition to the preference share injections they had previously received (1.25bn and 1.162bn as above). (c) Restructuring Under its mandate for non-viable entities, FROB has provided an asset-protection scheme (APS) for CajaSur prior to its sale to BBK. Currently FROB estimates the losses from this operation will amount to 392mln. FROB is also providing contingent liability support for the CAM (which has been sold to Banco Sabadell). Most other support for non-viable entities has instead come via the deposit guarantee fund, which has provided aid in the Unnim sale to BBVA, as well as both an asset-protection scheme and a significant capital equity injection for the CAM restructuring (in excess of 5bn in ordinary shares).
News of the clean up needs some further detail before a full assessment can be made but our initial read is that the measures do not turn around Spanish problems. Why? The latest move by Spain results in another migration of private sector risk to the public sector. Importantly, in this context, the total numbers may be getting more realistic but are unlikely to be the final word. Spain does not have many chances left to clear the information vacuum and provide a one-off solution to the bank risk. The lesson from Ireland, where the size of problem continued to be revised higher, is that markets eventually lose patience. In addition, a large role for the private sector in the solution is inconsistent with historical success stories in clean-up policy. This will simply mean Sovereign bad bank backstops and funding are ultimately necessary - and allied to the provisions needed by smaller banks - we expect that Spain is likely to end up holding stakes in these banks. Finally, the market and economic backdrop for Spain to execute the clean-up is not benign and is made harder by the existence of the ESM which if needed will subordinate Sovereign debt holders. This threat, which on the deficit risk alone, means that we see no low yield equilibrium.
2x st dev
-2x st dev
Mar-07 Apr-08 May-09 Jun-10 Jul-11 Aug-12
Jul-06
Jan-08
Jul-09
Jan-11
Jul-12
On a fundamental basis, 10s30s appears statistically steep and this is supported by our long end curve model, which shows that the current level is almost 2 standard deviations above the implied level. [The model is based upon a linear regression of 10s30s vs. GBP 2y swap rate/10y10f GBP vol/1y1f GBP vol/20y20f GBP swap rate/JPY 20y 20f swap rate] However, though the curve appears too steep at first glance, as we highlighted last week, the spread remains strongly directional and correlated to the outright yield of 10y bonds. The relationship between 10s30s vs. 10y yields suggests that there is scope for bull flattening; but we do not believe we are there yet. 10s30s aggressively flattened post MPC meeting, but this was driven almost entirely by 10y yields selling off 8bp.
10s30s correlation to 10y suggests flattening can occur But there can still be further steepening to go
50 1.40 1.20 10s30s 1.00 0.80 0.60 0.40 1.8 2.3 2.8 10y
Source: RBS
residual
40 30 20 10
Whilst we like the idea of 10s30s flattening, until we see evidence of a breakdown in the correlation we do not think it is right to enter the trade given our bullish outlook for Gilts. PPF 7800; funding levels turn back down The latest update from the Pension Protection Fund (which gives an estimated funding position on an s179 basis for defined benefit schemes) shows deterioration in the funding position of schemes in April, with the aggregate deficit of the schemes in the PPF 7800 index having increased to 216.8bn in April from 206.2bn in March.
Assets (billion)
Liabilities (billion)
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
bn
50 100 150 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Source: RBS
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Source: RBS
bp
The aggregate deficit of the 6,432 schemes in the PPF 7800 index is estimated to have increased over the month to 216.8 billion at the end of April 2012, from a deficit of 206.2 billion at the end of March. As a consequence, the funding ratio decreased from 83.4% to 82.6%. Total assets were 1031.4bn and total liabilities 1248.2bn. There were 5,228 schemes in deficit and 1,204 schemes in surplus.
Though the rise in the deficit in itself means funds have less to invest, there will likely be a requirement at some point for significant cash injections from sponsors companies. The recent UK Pension Regulator statement has suggested that pension scheme contributions are going to rise as a result of the widening scheme deficits and with new money tending to be directed towards bonds, this should continue to support long end Gilts. The chart below shows 10s30s Gilts vs. the PPF index and corroborates with the statistical evidence that 10s30s is too steep.
PPF7800 index vs. Gilts 10s30s
200 150 100 50 0 -50 -100 -150 -200 -250 -300 Mar-03 PPF 7800 balance UK10s30s (rhs inverted) -100 -50 0
Scandinavian Strategy
Par Magnusson
Armament
Tensions are rising. The Greek exit debate is becoming louder and bank downgrades loom large in Scandinavia. Remain long safe haven assets as a default position. We take note of the Riksbanks announcement that it now prepares for financial war by establishing a framework for QE and LTRO. This is covered bond vs. ASW bullish. We are happy to take profits on some of our outstanding trades, but will not argue against moving the profit targets further to stay the course. We believe the market is still largely in denial when it comes to accepting the risks we are facing, and the scope for drastic monetary policy action. Keep selling SEP12 RIBA.
While the Riksbank did mention a bond portfolio as a possible monetary policy tool in a report published on 27 April, the fact that these plans are now put to work in combination with the raised possibility of LTRO has great symbolic value. It is well known to the market and perhaps even better known at the authority responsible for financial stability that a number of Scandinavian banks are facing potential downgrades by one to three notches in the near future. Moreover, the EMU crisis has no doubt accelerated in the wake of the Greek elections with rising exit risk. Consequently, the timing of this announcement is suspicious to us.
Effect on 5yr covered bond-ASW spread when the last LTRO was announced in 2009
Source: Bloomberg
It is often said that actions speak louder than words, and while the Riksbank has downplayed the risks to the financial system and the economic development from the EMU crisis in its normal communication, this preparation for financial war suggests that the Riksbank remains true to its character as a swift mover. Remember that the Riksbank went from hiking rates in September 2008 to cutting them by 450bp and introducing an LTRO in the span of nine months. (It even cut rates by 175bp in one go.) So, whats the takeaway? No one can say with certainty that the Riksbank will cut rates by 25bp at a time at each meeting for the remainder of the year to reach a policy rate of 0.50%. But, I do believe that there is bigger scope for drastic action in terms of expansive monetary policy than the opposite. Indeed, as I write the market doesnt even appear to expect two more 25bp rate cuts by the Riksbank, which means that the downside in rates still dominates, in my opinion.
Downside risk to rates dominate in Sweden - Fair value spread to current SEP12 RIBA
Fair value 1.50 1.48 1.46 1.31 1.29 1.27 1.10 1.08
Source: RBS
However, having been a proponent of being long the SBG1041 outright for quite some time, I must say that there seems to be better value in the RIBA or FRA market for those who wish to take on a long position in the short end of the Swedish curve. The average RIBA rate until the SGB1041 matures in May-14 is 1.10%, which is 15bp richer than the bond. Such a difference can be attributed to either a positive carry in the bond position or by the safe haven quality in the bond for real money investors that cannot be emulated in a money market derivative. Since carry is actually negative by some 2bp/month in the SGB1041, it is reasonable to assume that the bond is given additional
intrinsic value by virtue of being a place to park your money in a risk-averse world, and for being a potential target for Riksbank bond purchases. As argued above I dont think the Riksbank would be a heavy buyer in government bonds once it activates its bond portfolio, so we are left with the SGB1041 being particularly rich due to its store-of-value characteristic. A more daring trade could be to short the SGB1041 and sell the SEP12 RIBA, which would give you positive carry, while hedging the delta exposure.
Industrial production ex chemicals and pharma [ma 12] Sweden, Industrial production, Total excl energy [ma 12, c.o.p 1 month]
Source: Ecowin
Trading recommendations
Consider taking profit on the SGB1041 position as we have hit the 0.95% target. Sell SEP12 RIBA at 1.33% for an intermediate target of 1.27%. The target of 100bp spread between the SGB1041 and the ASW has just been reached. Feel free to take profits, but there is still a case for an even wider spread as bank downgrades loom large. I do admit, however, that the potential for ASW spread trades is bigger in covered bonds as we may see Riksbank LTRO put into effect and the covered bonds should outperform swaps. The 2-4yr relative SEK IRS steepener vs. USD is still alive and well. 9bp in the money with more to go. Keep it on with a profit target of 10bp, currently at 21bp.
Giles Gale
The AFT has announced that the supply for Thursday will be 800m-1.2bn of OATei22s, OATi23s, and OATei27s. This is smaller size than usual, perhaps reflecting market conditions that might reasonably be viewed as moderately adverse. The choice of bonds, on the other hand, is relatively long. This seems sensible sub 10y paper has been distinctly unloved recently. There was little market reaction to the announcement and I would not expect it to pose difficulty unless conditions deteriorate substantially. Trade ideas: The recommendation to receive 5y5y breakeven in bonds against swaps has been stopped out. I reinstate it at current levels (75bp Buy OATei20s vs OATei15s in equal cash amounts on b/e, against pay 10y swaps, receive 5y swaps in equal notionals with whole package duration neutral), looking for 35bp profit, with a stop at -15bp. The remainder of this article is adapted from Linked-Up, published on May 10.
Spare capacity
90 80 70 60 50 40 30 20
95 90 85 80 75 70
10 0 Dec-14
Jun-10 France
Source: EU, RBS
This in turn suggests to me that the Euro Area might in fact face more price stickiness and a higher bar for core inflation. I also expect that this should mean that lax monetary policy is more effective and that the Euro Areas response to inflationary shocks (and, whether oil or a secular trend to higher import costs resulting from abroad will be greater pass-through to HICP. But perhaps thats a good thing. The Euro Area needs higher inflation. A rebalancing in price levels cannot be drawn out in an environment of real social pain for the best part of a decade. Inflation, not alarming inflation, but inflation above 2% will help. German hair shirt wearing insistence to the contrary is unhelpful. But fortunately it is unlikely to get its way. I dont believe that Germany has the upper hand in the debate regarding the appropriate policy mix and I dont think that the ECB, inflation fighter or no, will prize low inflation over financial stability and Euro Area cohesion. Besides Germany had ECB forbearance when it was disinflating in 2003-5 (at a time when to do was relatively easy because the global economy was entering and the riding a robust upswing) inflation was stuck stubbornly above 2% for almost all of 2000-2006, including for nearly all of the period of 2% rates. Indeed Germany was also naughty with its public finances at the time. Naturally I dont expect them to remember things this way, but it shows that it may be forced to tolerate higher inflation than it would like as the ECB sets rates according to Southern needs. Finally I think that the experience of H1 2011 when the ECB hiked rates is significant. I therefore think that it is entirely reasonable to assume that the ECB will accommodate price shocks and use an output-gap methodology to justify it. My conclusion, then, is that Euro Area stagnation is possible, even likely. But I dont think that Japanification is likely to extend to chronic low inflation or deflation.
A whistlestop tour of the risks around Euro Area breakup and so on reinforces the idea that inflation, not deflation is most likely to arise from breakup scenarios. Essentially I expect an exit (Greece?) to be met with alarm, to which the first reaction of policymakers will be more liquidity, possibly more public sector assistance, and recognition that Greeces path may be that of others if too much is demanded of voters. That means inflation to me. Should the measures fail, however, then I expect Euro Area inflation to take off as more countries leave. This is not a 10-year story it is a five year one at most. Regulation is perhaps the final nail in this one. Although it is not clear how the dutch pension reform will proceed without a government to address the tricky bits, I think that the pension funds feel that they are winning the debate, and will remain quiet until after there is clarity, at least. That is likely not to be until late this year now. I still expect the new regulations to deemphasise long-dated inflation hedging (and probably also rates hedging). Note that I am uncertain about the impact this may ultimately have on the 10y point, since extrapolation methodology might add a bid to the last liquid point (LLP), if this is the way chosen.
Jan-12
Mar-12
May-12
Source: RBS
Trade idea: Use the steepening to put on b/e flattening. I like 2s10s but prefer 5s30s as the short term sensitivity is are lower. Enter at 59bp. Target 25bp profit, stop at 10bp.
French inflation
Keep French vs European inflation. I still expect that the raising of the Livret-A ceiling will support the BTANi.
Iota
Keep 5y5y iota & long 5y5y breakeven in bonds. The bond/swap spread remains much too wide.
UK
The DMO has announced IL62s will be reopened by syndication the week after next. I believe that this confounds expectations that had been moving toward a new 30y linker. While a new 30y is likely before long, this is a small negative for linkers generally and for ultra-longs specifically. Trade ideas: Ultra-longs have been a little scarce in the market in the last few days and have outperformed the 30y area, but I now no longer expect this to continue and close my 30s50s breakeven steepening suggestion. The remainder of this article was published on May 10 in Linked-Up. As I write I dont have the benefit of knowing the MPCs mind regarding QE, the announcement coming at lunchtime. Clearly this will have some relevance for the linker market, but there are some observations that are still worth making in advance.
Firstly, regarding QE, RBS officially expects discontinuation, and this is also my view although the rather worse data recently does suggest that there is a small chance, say 20% of extension. I believe that I am not far from the market in this which means I am confused at gilts strong performance outright and against swaps where not only are we in the QE (Oct-11 to date) range, we are at the tight end of it (sidebar). A robust 52s syndication and 42s auction yesterday make it impossible to argue that there is no demand at these levels. I can only assume that this is mainly about safe haven flows, but I dont see disappointment in QE giving way to much weakness in conventionals and linkers have been very directional with conventionals recently so I dont see much upside for linkers in the near term from this either. The counterargument is that nearly all the rally in nominals recently has been in breakeven contraction. Real yield resistance at zero in 30-years may be partly due to supply and partly because linker buyers still do hope that the end of QE will give rise to higher real yields. On the latter there may be disappointment by the looks of things, but the linker syndication later this month is likely to keep buyers hoping, and that may keep a lid on valuations.
Source: RBS
So is the curve, but supply might push 10s30s away from nominals
If breakevens are steep in 10s30s, it is naturally because conventionals are steep in 10s30s. The chart below shows just how tight the relationship has been for nearly two years. Nevertheless unless we get a 10-year linker next week (which I think is very unlikely), supply looks like it might push the yellow point below above the trend line. We have IL29s next month, but thats a relatively long way off, and a new 30y linker looks more likely to me than a third IL62s syndication. In the Rates Weekly last week, I argued that at these yield levels, and with very high uncertainty in risk markets, a 30-year might be felt a more sensible and safe option than 62s. But in any case, the 62s are already over 8bn, and can be topped up sufficiently by auction now. The 10-year area also looks cheap and the 30-year expensive. The right-hand chart on the next page (the zero-coupon iota) pretty clearly illustrates that, and although the L22s are still significantly rich against this, the bond-specific RV is small compared to the kinks in the fitted curve. Finally, QE and flight to quality alike have been supporting 10s in conventionals much more than the long end. Even if QE is extended, there must be some chance that the medium bucket is underweighted due to the pure technical constraint of low free-float. I therefore think that 10s30s may finally start to flatten. If you have this bias (and given
the tight correlation illustrated below between 10s30s conventionals and breaks, Id say only if you have this bias), I think that 10s30s breakeven flattening is a sensible trade. Trade idea: Enter 10s30s breakeven flattening. I like IL20s, so I suggest IL20s/IL42s at 67bp. Target 12bp, stop at -6bp.
10s30s breakevens are steep, but in-line with nominals
250
200
150
100
50
0 20 Since Nov-08 40 Since Dec-20 60 current 80 100 10s30s conventionals 120 140 160
Source: RBS
Volatility Strategy
Giles Gale
Market update
Volatility has been exceptionally well bid this week. Short expiries, which had become relatively cheap, have jumped very sharply, but bids have extended all the way down the expiries. The 30y column has been better bid than the 10y, reflecting the volatility in the long end that has revived some CVA receiving concerns. Interest in pinning shortdated rates in 1x3x2 receivers has also been ongoing. Long forward rates are now so low that selling long-dated OTM receivers break even at very low rates indeed and I imagine some yield enhancers may take note.
tightest against swaps in recent history compared to bunds (chart below). Of course there may come a time when we wonder about German credit quality, but that time is not now, and I would have expected the flight to quality to push bunds from the range that has really been established since late March.
German asset swaps have not behaved like flight-to-quality should
90 80 70 60 50 40 30 20 10 0 Nov-10 UK 10y asw
Aug-11
Nov-11
Feb-12
May-12
Source: RBS
Options on September contracts suggest a give-up of 6bp to enter bullish wideners. This looks reasonable to me. But on the other hand, while the implied tightening in a sell-off is aggressive compared to recent history, it is worth wondering if the failure to push wider now is indicative of a belief in liquidity that may cheapen asset swaps further on the way back up in yield. Shatz vol in puts looks cheap as top-left has been bid in swaptions.
Zero cost entry levels for September (24-Aug expiry) contracts and historic yield/asw levels for CTDs
-30 bp -40 bp -50 bp ATM Spread -60 bp -70 bp ATM -80 bp -90 bp -100 bp 0.0% Bund Hist ATM
0.2%
1.2% Bund
1.4%
1.6%
1.8%
2.0%
Source: RBS
ATM normvol surface historical 4-in-1 heat-map colouring denotes 3m z-score of each measure
1y 46.7 bp 54% -18.5 bp -18.7 bp 66.0 bp 77% -8.8 bp -8.5 bp 80.3 bp 75% 2.1 bp 2.5 bp 88.7 bp 98% 5.8 bp 6.2 bp 88.2 bp 94% 6.2 bp 6.8 bp 83.9 bp 88% 1.1 bp 2.0 bp 72.1 bp 72% -2.4 bp -1.2 bp bp vol level (3m z-score) PCA (with rates) (3m z-score)
2y 51.8 bp 59% -15.9 bp -15.7 bp 69.5 bp 77% -3.9 bp -3.7 bp 81.9 bp 82% 4.1 bp 4.6 bp 86.3 bp 96% 6.2 bp 6.5 bp 84.9 bp 89% 5.7 bp 6.2 bp 80.6 bp 85% 0.8 bp 1.6 bp 70.7 bp 72% -1.9 bp -0.8 bp Imp/Act ratio (3m z-score) PCA residual (3m z-score)
5y 70.6 bp 0.4 bp 80.3 bp 5.0 bp 84.6 bp 7.0 bp 84.6 bp 4.2 bp 82.2 bp 0.6 bp 78.9 bp 1.9 bp 71.0 bp 0.7 bp
80% 0.8 bp 92% 5.4 bp 93% 7.4 bp 92% 4.3 bp 88% 0.7 bp 81% 2.2 bp 72% 1.5 bp
10y 76.7 bp 88% 2.2 bp 2.7 bp 81.9 bp 94% 4.9 bp 5.2 bp 83.0 bp 91% 5.0 bp 5.1 bp 82.6 bp 89% 2.5 bp 1.8 bp 81.2 bp 85% 0.3 bp -0.2 bp 78.4 bp 79% 0.4 bp 0.2 bp 69.9 bp 70% -1.7 bp -1.1 bp
20y 77.9 bp 86% -1.1 bp -0.7 bp 80.7 bp 90% 2.6 bp 2.5 bp 80.1 bp 86% 2.5 bp 1.4 bp 77.7 bp 81% -1.1 bp -3.0 bp 73.9 bp 76% -1.9 bp -3.6 bp 69.8 bp 70% -1.2 bp -2.7 bp 58.8 bp 60% -3.9 bp -3.9 bp
30y 78.8 bp 84% -5.4 bp -5.1 bp z-score 81.1 bp 89% Rich 3 -1.9 bp -2.4 bp 2.4 80.5 bp 85% 1.8 -2.2 bp -3.6 bp 1.2 77.1 bp 79% 0.6 -4.3 bp -6.4 bp 0 72.9 bp 74% -0.6 -3.7 bp -5.6 bp -1.2 67.2 bp 68% -1.8 -3.5 bp -5.2 bp Cheap -3 54.7 bp 57% -5.5 bp -5.8 bp
Source: RBS
UK
Market update
Vol has also been well bid in GBP in general, in sympathy with the Euro Area. Top left has been particularly well bid, with the MPCs decision to pause (stop?) QE, allowing top-right to soften relatively, particularly as pausing QE maintained the sense that there has been a shift in the Banks view of inflation. This dynamic is clearly visible in the PCA analysis below. Vega has been a little softer.
2 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1 Nov-11 Dec-11 Jan-12 2y2y 2y spot
160
140
120
100
80
60
Feb-12
Mar-12
Apr-12
May-12
Source: RBS
May-06
May-08
May-10
May-12
Source: RBS
This combination suggests selling exposure to lower rates if you believe that the Bank is likely to pay more attention in the future to inflation overshoots. Selling ATM receivers on 2y2y, for example gives protection in a rally to around 1.2%, which is close to the lows in spot (at around 1.15%), and selling 10bp OTM receivers will not lose until below this level. On the other hand, selling receivers carries badly in the rates and in the current environment of high anxiety on the Euro Area may not be particularly attractive. 1x2s in receivers are an alternative: to express a modestly bearish view buying deep in the money receivers and selling the ATM can be done at a spread wide enough that the strategy can be protected in a rally down to 1% in 2y at expiry. To illustrate, P&L regions for 1x2 receivers with front strike 42bp in-the-money are shown below.
P&L regions for 1x2 receiver spreads with front strike set 42bp OTM
2 .5
A ll e xp ire O T M
2 .0
1 .5 (%) 1 .0
Lose Lose
Ma x P ro f it
Lose
0 .5
O c t-1 1
A p r-1 2
F ro nt s trike F o rw a rd s
O c t-1 2
A p r-1 3
Ma x P &L
O c t-1 3
A p r-1 4
Source: RBS
ATM normvol surface historical 4-in-1 heat-map colouring denotes 3m z-score of each measure
1y 59.9 bp 92% -12.5 bp -9.5 bp 77.4 bp 90% -10.8 bp -7.5 bp 86.3 bp 78% -4.3 bp -1.0 bp 90.1 bp 84% 2.5 bp 3.9 bp 85.3 bp 65% 5.6 bp 6.5 bp 76.8 bp 77% 5.1 bp 6.5 bp 64.8 bp 74% -0.1 bp 1.9 bp bp vol level (3m z-score) PCA (with rates) (3m z-score)
2y 67.3 bp 92% -12.3 bp -9.0 bp 80.9 bp 89% -7.0 bp -3.8 bp 87.6 bp 84% -1.4 bp 1.4 bp 88.3 bp 80% 3.4 bp 4.8 bp 83.3 bp 70% 5.4 bp 6.6 bp 75.8 bp 84% 4.2 bp 6.0 bp 63.9 bp 76% -0.8 bp 1.0 bp Imp/Act ratio (3m z-score) PCA residual (3m z-score)
5y 78.5 bp 91% -6.8 bp -5.2 bp 82.9 bp 86% -3.0 bp -1.5 bp 85.4 bp 79% 0.9 bp 2.2 bp 84.7 bp 75% 3.7 bp 4.6 bp 80.0 bp 76% 4.4 bp 5.1 bp 73.6 bp 83% 1.6 bp 2.8 bp 61.2 bp 71% -2.5 bp -1.2 bp
10y 84.2 bp 91% 0.0 bp -0.7 bp 83.6 bp 87% 0.4 bp 0.1 bp 82.1 bp 82% 1.3 bp 1.2 bp 79.3 bp 79% 2.5 bp 3.2 bp 76.1 bp 80% 3.2 bp 3.7 bp 71.0 bp 84% 0.6 bp 0.7 bp 59.1 bp 67% -2.8 bp -2.5 bp
20y 78.3 bp 93% 0.1 bp -2.2 bp 77.8 bp 90% 0.8 bp -1.3 bp 76.1 bp 85% 1.0 bp -0.5 bp 73.3 bp 82% 1.2 bp 1.1 bp 69.5 bp 79% 0.4 bp 0.3 bp 64.2 bp 76% -2.1 bp -2.8 bp 51.9 bp 62% -5.2 bp -5.6 bp
30y 73.4 bp 91% -1.2 bp -4.3 bp z-score 73.8 bp 89% Rich 3 0.4 bp -2.5 bp 2.4 72.4 bp 84% 1.8 0.5 bp -2.1 bp 1.2 69.8 bp 80% 0.6 0.1 bp -0.9 bp 0 65.4 bp 75% -0.6 -0.7 bp -1.5 bp -1.2 59.7 bp 71% -1.8 -3.0 bp -4.1 bp Cheap -3 47.0 bp 56% -6.2 bp -7.1 bp
Source: RBS
Brian Mangwiro
EUR and GBP FRA-OIS changes (2nd IMM dated contract). EUR FRA-OIS has tightened sharply. Complacency?
8 6 bp post-election spike
Feb-12
Mar-12
Apr-12
May-12
Source: RBS
10-Feb
10-Mar
10-Apr
10-May
Source: RBS
Note that (i) FRA-OIS widened most in EUR, and is reversing these moves much faster in EUR too. Is this a mark of complacency? Vol down, FRA-OIS down, while event risks
loom large. (ii) FRA-OIS basis between GBP and EUR has been widening since Jan12. This weighs on Short Sterling much more, hence our preference to sell Short Sterling versus Euribor. One could argue that credit risk in the Eurosystem is being under-estimated, especially with the Euribor bank panel CDS still widening. Simply, this reflects the direct pumping of liquidity in Europe via ECB LTROs versus its absence in the UK. Excess liquidity distorts credit risk premia, in our view. Recommended strategies: For Euribor, we recommend to maintain longs in June-12, Sep-12 and Dec-12 contracts. Our reasoning is two-pronged: (i) copious amounts of liquidity in the Eurosystem, but more importantly, if the crisis deepens, the ECBs hand will be forced. We believe that currently, only the ECB has the pre-disposition and balance sheet to respond. More easing will come, Euribors will richen, hence our bias to play for upside in front white Euribors. RBS economists still expect two more ECB rate cuts in 2012: in June-12 and Sep-12.
June-12 Euribor: price and open interest
99.45 99.40 99.35 99.30 99.25 99.20 99.15 99.10 99.05 99.00 Jan-12 Mar-12 May-12
Source: RBS
Open interest in June-12 Euribor 99.50 and 99.625 call options is down. Buy.
400000 350000 300000 250000 200000 150000 100000 50000 0 Jan-12 ERM2C 99.50 ERM2C 99.625 Mar-12 May-12
Source: RBS
Open interest in Sep-12 Euribor 99.50 and 99.625 call options is down. Buy.
300000 250000 200000 150000 100000 50000 0 Jan-12 ERU2C 99.50 ERU2C 99.625 160000 140000 120000
Open interest in Dec-12 Euribor 99.50 and 99.625 call options is down. Buy.
250000 200000 150000 100000 50000 0 Jan-12 ERZ2C 99.50 ERZ2C 99.625 250000 200000 150000 100000 50000 0 Mar-12 May-12
Source: RBS
We would buy (i) outright futures; (ii) 99.50 and 99.62 call options (the decline in open interest implies suggests shorts exited in size. We see good value and recommend to stay long), or (iii) tactical whites/reds steepeners. Our convictions and trades remain unchanged. The sell-off was mainly driven by panic profit taking, in our view, and liquidations were much sharper on the 99.50 strike. Front Euribor futures are still 7 ticks off their recent highs; vol is still floored and entry levels are still good. Recent flows suggest that investors are returning back to these rate cut trades (open interest has a 2-day lag). FRA-OIS outlook for the coming week: We are surprised that EUR FRA-OIS is tightening sharply, especially when (i) Greece still has no government, (ii) Spain has its banks (and corporates) effectively shut out of capital markets, with deeply entrenched
balance sheet problems. Spain is also struggling with high borrowing costs; current 10y SPGB is yielding 6.0%; and (iv) Moodys impending re-rating of European banks. Moodys re-rating exercise is the one to watch. Bank downgrades will widen FRAOIS. Depending on the magnitude of downgrades, victims may not be able to borrow from money-market funds (as they tend to have strict borrowing criteria), deepening the addicted bank problem. For choice, we still position for whites/reds, whites/greens steepeners. This is a tactical play. Long term, we expect further steam rolling of the Euribor strip.
Sep-12 Short Sterling. Rising open interest and price dropping suggests overall short positioning
Open Interest L U2 price 350000 330000 310000 290000 270000 250000 230000 98.70 98.60 Jun-11 210000 190000 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12
Source: Bloomberg, RBS
50
40
20 May-11
Sep-11
Jan-12
Short Sterling reds have hit key supports. Positioning is net short and looks to be a range trade
99.15 99.05 98.95 200000 98.85 150000 98.75 100000 98.65 Open Interest L U3 price 250000 300000
Short Sterling greens are still above 3m lows; still room for downside high delta option plays
98.90 98.80 98.70 100000 98.60 98.50 98.40 98.30 40000 98.20 80000 60000 Open Interest L U3 price 140000 120000
50000
98.10
0 Oct-11 Dec-11 Feb-12 Apr-12
Source: Bloomberg, RBS
98.00 Aug-11
Here is how we would trade short Sterling: Futures: The strip is heavily pre-disposed to a market sell-off high GBP FRA-OIS and fairly unchanging 3m GBP LIBOR limit upside potential. Also, market stresses are felt much more in GBP space relative to Europe. The likelihood and magnitude of downside moves increases from front to back contracts, hence our bias for tactical steepeners. Whites/reds spreads are OK, but reds/greens steepeners seem to have more juice. Options: There is more headroom for downside play in greens (1y2f) than whites (3-, 6- and 9m1yf) and reds (1y1f). Reds have sold off to key supports (see bottom left chart above). To break through these levels, we need decent economic data (in the UK or US) and/or magnified risks of inflation stickiness. Both are likely, in our opinion. For now, short positions in greens are more appealing. That said, positioning seems overwhelmingly short and that is indeed a worry. If UK data started to show significant deterioration, it could get squeezy soon. In line with our preference for reds/greens steepeners, we would buy upside in reds via call spreads. Strategies: (i) We like selling upside above 99.00 and use that to finance downside exposure, especially in reds and greens. You can cap your losses via selling call spreads, but above 99.125, we have a very strong conviction to sell naked calls to finance buying puts, especially in greens. Like many, we do not see the prospects of a BoE rate cut, and inflation is more likely than not to be a problem in the medium term; and (ii) the wide trading ranges means Short Sterling normalised vol remains rich, especially in reds and greens. In this backdrop cheap, low delta and expiry targeting structures will be largely a miss. We prefer high delta positions on the downside; capture the move as it happens. Of course you pay more, but you also get what you pay for.
Bobl open interest has declined recently from record highs. It seems shorts were squeezed out
Open interest 900000 800000 700000 600000 500000 400000 300000
DUM2 DUZ1
OEM2 OEZ1
OEH2 OEU1
200000 100000
Days to expiry 0 80 70 60 50 40 30 20 10 0
Source: RBS
Schatz: open interest is still at the levels seen during the Dec-11 contract roll. The ultra-low yields (current 7.5bp) have not deterred buying; unsurprising given the high structural demand for AAA collateral. If the crisis deepens, we expect negative Schatz yields.
Bobl: open interest has been steadily declining in the past 10 trading days in line with market flows. Investors have been switching out of DEM5y into 5y DSL, RAGB and OATs. The side chart also provides further evidence of the drop in interest, but with the price holding firm, suggesting shorts caught offside rather than initiation of new shorts. In line, DEM5y has not underperformed; stuck in an 8bp range (currently 53.6bp). Nonetheless, the risk of Bobl underperforming cannot be overlooked, especially as it is quite rich on the fly.
Bund open interest is still grinding higher. With Schatz and Bobl at ultra lows, Bunds are the new sweet spot
Open interest 1000000
Buxl open interest is at record highs. (25y) sector is flattening. Is this an extension of the yield grab?
Open interest 60000
50000
800000
40000
600000
30000
200000
10000
Bund: Bund open interest is still grinding higher, almost touching on Sep-11 highs. With Schatz and Bobl floored in yields, Bunds are the next sweet spot for carry/ rolldown, especially for investors restricted to investing in EMU AAA government bonds. That open interest and price are both rising suggests the market is still getting long. This is further substantiated by the futures yield spread charts shown below. Buxl: This contract has seen a significant surge in open interest coupled with flattening in the 2s30s, 5s 30s and 10s30s slope. This suggests the market is getting long German long end as well in search of yield, given that the front end of the curve is well-bid and super flat. Another consideration is the Solvency II framework due to be implemented in Europe. Broadly, this is expected to reduce demand at the very long end as pensions funds shift from bonds to a swap discount curve (thus less structural demand for the long end). The Buxl CTD is a 25 yr, which is around the last liquid point on the swap discounting curve under Solvency II. This would stimulate some hedging demand, and consequently an increase in open interest.
bp
Bobl-Bund spread had been resistant to tightening for some time. Welcome
110 bp 105 85 100 95 90 DEM 5-10y generic 85 80 3-Apr-12 RXM2-OEM2 21-Apr-12 70 9-May-12
Source: Bloomberg, RBS
90
80 175 75 170 165 3-Apr-12 UBM2-OEM2 DEM 5-30y generic 21-Apr-12 150 9-May-12
Source: Bloomberg, RBS
60 55 50 9-May-12
Source: Bloomberg, RBS
80 3-Apr-12
21-Apr-12
We like DEM 2s10s and 5s30s flatteners. Schatz yields are floored; edging close to yield parity with 12m Bubills. The most popular trade would be a 2s10s flattener. TRADE IDEA: Buy June-12 Bund futures (RXM2) versus selling June-12 Schatz (DUM2) at current 117bp (in CTD yield terms; stop at 130bp) and target a 25bp compression in the spread. Hedge ratio is 1000 RXM2: 180 DUM2. Using generic bonds, the spread is currently at 142bp. On the 5s30s flattener, the current spread is 177bp, and we would also target a 25bp tightening in the spread at first, stop at 188bp (we like this trade very much). Note that the Buxl CTD is a 25yr bond. Therefore, strictly speaking, this is a DEM 5s25s spread. Also keep in mind the contract roll requirements. June-12 bund futures contracts expire on the 7th of June 2012.
June-12 Long Gilt futures open interest versus previous contract rolls; a tad below average
400000 350000 300000 250000 200000
June-12 Long Gilt futures open interest versus price. Trends suggests market went short before the MPC
118.50 118.00 320000 117.50 117.00 116.50 300000 116.00 150000 115.50 100000 115.00 280000 114.50 114.00 2-Apr 270000 9-Apr 16-Apr 23-Apr 30-Apr 7-May
Source: Bloomberg, RBS
G M2
Open interest
330000
310000
290000
G M2 G U1
G H2 G M1
G Z1
50000 0
80 75 70 65 60 55 50 45 40 35 30 25 20 15 10
UKT 5% 25 auction and the CTD switch: As we mentioned last week, the UKT 5% Mar-25 bond gets auctioned on the 15th of May. If the bond were to concede into the auction, this will further raise the CTD switch hurdle. Our general view is that the bond is not too attractive on flies, and may need to see the some concession for strong results. By and large, the larger the concession, the higher the chances of a good takeup and strength of a post-auction rally, which would in turn support the CTD switch optionality (25s rally much more than 22s). Until then we wait. Below we show our usual customary scenario analysis charts for June-12 delivery.
Same-day net basis (NB) scenario analyses. For CTD, NB at delivery is zero. CTD switch to Mar-22s happens at point A, and to Sep-21s at point B
2.00 1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 60 40 30 20 10 0 -10 -20 -30 -40 -60 B 114.5000 112.5000 110.5000 market sell-off market rally
Source: Bloomberg, RBS
Theo fut prices for June-12 deliverables. Lowest price = CTD at the yield level. CTD switch to Mar-22s happens at point A, and to Sep-1s at point B
net basis at delvry (GBP0.00) 124.5000 UKT 3.75% Sep-21 UKT 4% Mar-22 UKT 5% Mar-25 122.5000 120.5000 118.5000 A 116.5000 B Price UKT 3.75% Sep-21 UKT 4% Mar-22 UKT 5% Mar-25
market sell-off
market rally
60
40
30
20
10
-10
-20
-30
-40
-60
Note that: (i) our scenario analyses show a CTD switch is still possible if outright yield levels in 10y Gilts drop by 10bp (to c. 1.85%; current 1.96%); (ii) a strong post-auction rally will help reduce the hurdle; and (iii) an even stronger rally brings UKT 3.75% Sep21 into the frame as yet another CTD competitor. In the event of a messy conclusion to the Greek saga, we can see 10y Gilts at 1.5%, 10y bunds at 1%, in which case, the UKT 3.75% Sep-21 bond should become CTD.
Technical Strategy
Dmytro Bondar
Bund RX1 daily chart with Fibonacci retracements, slow stochastic, volume and 9-day MA
Bund RX Bunds reached the 142.85 target, but displayed signals of a possible correction If so, the major support levels should provide buying opportunities, as we believe the long-term view remains bullish
Sweden 10-yr In the long term, the market is still bullish post key level breakout and positive momentum In the short term, it is overbought and a correction to 5-day MA looks possible
Bund RX1 met the 142.85 target (long-term target published in the previous weekly) and even rallied to 143.00; although in our view the trend looks like it has run ahead of itself and hence a correction/consolidation is needed. Among technical indicators pointing to this are momentum divergence with the price, a Harami cross candlestick pattern and a 3rd-time failure to break 143.00. If so, the key support levels would be 142.00 and 141.40. The bias is for a correction/consolidation in the short term to 142.00 (possibly 141.40), but a resumption of the uptrend to 143.00 and new highs thereafter. Once 143.00 is broken, our next long-term targets would be 143.70, 144.30, 144.70 and 145.10.
10-yr Sweden daily chart with Fibonacci retracements, 5-day MA and RSI
Sweden 10-yr generic yield a break of the 1.55% resistance (the 150% Fibonacci retracement from the Aug10-Feb11 extremes) in a strong trend suggests further potential for the yields to go lower to the next key resistance level 1.39%, although an RSI oscillator entering overbought region (on the yield chart) suggests a possible pause/correction to the 5-day moving average before trend resumption.
Gross Issuance
Our gross issuance forecasts for 2012 are adjusted to reflect the extra funding required for the ESM (a total of EUR 32bn shared across the euro area countries). The percentage contributions to the ESM are based on each countrys National Central Banks contribution to the ECB capital key. Please note that all issuance amounts are quoted on an auction date basis rather than a settlement date basis.
Gross Issuance 2012 (EUR bn)
RBS Forecast Germany France Italy* Spain Nether. Belgium Austria Finland 182.0 195.0 221.0 98.0 61.0 28.0 22.0 13.0 Year To Date 66.0 85.0 80.3 48.1 30.8 17.0 10.2 3.0 ESM contrb. (%of 32bn) 27.1% 20.3% 17.9% 11.9% 5.7% 3.5% 2.8% 1.8% RBS adj. for ESM 190.7 201.5 226.7 101.8 62.8 29.1 22.9 13.6 Remaining (inc. ESM) 124.7 116.5 146.4 53.7 32.0 12.1 12.7 10.6 % complete (inc. ESM) 34.6% 42.2% 35.4% 47.2% 49.1% 58.3% 44.6% 22.1%
Chart 1 below shows the total amount issued by each country compared to the amount that remains to be issued in order to meet the countrys funding requirement for 2012 (according to our estimates, including ESM funding).
11 3 Finland
.
Chart 2 shows a breakdown of the debt issued to date this year by maturity sector (as a percentage of the total amount issued to date).
80%
100%
Germany
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 19 15 13 6 14 9 19 16 9 13 13 7 152 2005 20 6 14 7 12 18 9 5 13 12 12 7 136 2006 27 7 23 13 8 11 21 7 17 11 11 7 162 2007 20 6 14 9 12 12 16 6 13 15 12 7 142 2008 18 6 18 7 13 13 20 6 15 12 11 7 146 2009 13 6 20 7 21 20 6 6 24 13 17 5 158 2010 24 18 17 24 20 18 15 13 19 11 18 10 207 2011 20 16 17 22 18 16 10 13 16 12 18 10 188 Average 20 10 17 12 15 15 14 9 16 12 14 8 161 Avg % complete 12% 19% 29% 37% 46% 55% 64% 69% 79% 87% 95% 100% 100% 2012* 16 18 11 16 15 15 15 10 20 20 20 15 191 2012 % complete 8% 18 % 24 % 32 % 40 % 48 % 55 % 61 % 71 % 82 % 92 % 100 % 100 %
France
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 16 14 14 11 13 14 9 11 11 12 125 2005 14 20 10 10 10 13 14 11 9 11 123 2006 13 12 11 13 11 9 14 10 11 9 113 2007 13 12 9 11 11 11 9 8 7 8 97 2008 13 14 11 18 7 11 7 12 13 14 118 2009 15 15 18 16 17 23 16 18 18 17 6 179 2010 23 19 23 20 21 20 20 19 20 20 9 214 2011 22 21 19 22 23 21 20 20 18 17 5 208 Average 16 16 14 15 14 15 14 0 14 13 13 2 147 Avg % complete 11% 22% 32% 42% 51% 62% 71% 71% 80% 89% 98% 100% 100% 2012* 19 20 18 19 18 21 21 20 20 20 6 202 2012 % complete 9% 19 % 28 % 38 % 47 % 57 % 67 % 67 % 77 % 87 % 97 % 100 % 100 %
Italy
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 23 22 26 26 18 14 12 11 15 12 8 186 2005 23 17 16 18 16 17 13 9 17 16 2 8 171 2006 17 19 18 19 15 18 14 10 11 11 4 13 166 2007 15 17 18 19 16 17 14 11 13 18 3 9 167 2008 19 17 12 21 15 14 15 12 7 15 14 14 173 2009 20 24 25 30 23 27 29 18 28 21 10 13 268 2010 24 24 19 19 19 20 21 22 25 24 15 15 246 2011 21 17 19 24 18 18 15 10 20 18 15 11 206 Average 20 20 19 22 17 18 16 13 17 17 8 11 198 Avg % complete 10% 20% 30% 41% 49% 59% 67% 73% 82% 90% 94% 100% 100% 2012* 20 19 26 16 17 21 20 16 21 20 16 15 227 2012 % complete 9% 17 % 29 % 35 % 43 % 52 % 61 % 68 % 78 % 86 % 93 % 100 % 100 %
Spain
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 4 3 2 2 4 6 2 3 2 4 4 37 2005 10 3 2 4 3 2 1 5 1 3 1 34 2006 5 3 3 2 1 1 3 2 5 1 1 28 2007 5 2 3 4 6 2 3 2 1 27 2008 6 5 1 2 4 2 5 4 2 5 12 9 57 2009 9 16 7 10 14 3 10 4 12 8 9 5 107 2010 10 9 11 6 7 8 13 4 7 8 7 8 96 2011 9 7 8 8 7 8 6 4 8 9 9 12 94 Average 7 6 5 5 5 5 5 2 5 5 6 5 60 Avg % complete 12% 22% 30% 38% 46% 53% 62% 65% 74% 82% 91% 100% 100% 2012* 19 14 8 5 7 7 7 5 8 8 7 7 102 2012 % complete 19 % 32 % 40 % 45 % 52 % 59 % 66 % 71 % 78 % 86 % 93 % 100 % 100 %
Netherlands
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 3 2 7 2 2 2 2 3 7 2 31 2005 3 2 2 7 2 7 2 2 2 2 29 2006 2 2 2 2 2 1 5 2 3 2 21 2007 1 3 2 2 6 4 2 21 2008 3 7 3 3 2 16 5 2 40 2009 6 7 4 4 4 4 7 4 3 4 48 2010 6 10 4 5 9 5 3 4 2 3 1 53 2011 6 2 10 5 3 3 5 5 8 4 49 Average 4 4 4 3 3 3 4 0 5 3 3 0 37 Avg % complete 10% 21% 32% 41% 49% 58% 69% 69% 83% 91% 99% 100% 100% 2012* 6 10 7 6 6 6 8** 5 5 4 63 2012 % complete 10 % 25 % 37 % 46 % 56 % 65 % 78 % 78 % 86 % 94 % 100 % 100 % 100 %
Belgium
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 5 3 5 3 3 2 22 2005 5 5 3 3 4 2 21 2006 3 5 3 2 2 16 2007 5 3 5 3 3 3 23 2008 4 3 3 5 3 3 2 4 28 2009 7 3 5 4 2 5 3 3 3 35 2010 5 4 4 4 9 3 3 2 3 2 39 2011 3 6 5 3 4 4 3 3 4 2 2 38 Average 4 2 4 3 3 2 3 1 3 1 2 0 28 Avg % complete 15% 23% 38% 47% 57% 65% 76% 78% 89% 91% 100% 100% 100% 2012* 5 4 8 3 2 2 3 1 1 29 2012 % complete 17 % 31 % 59 % 59 % 69 % 76 % 83 % 83 % 93 % 97 % 100 % 100 % 100 %
Austria
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 3 1 1 2 1 1 1 1 1 1 14 2005 4 1 2 6 1 1 1 1 1 16 2006 4 1 1 5 2 2 2 1 1 18 2007 3 1 1 2 1 1 2 5 1 1 17 2008 4 1 1 1 1 1 1 1 1 1 1 11 2009 3 2 2 1 2 4 2 2 2 2 1 23 2010 4 2 2 2 2 2 1 1 2 2 1 1 22 2011 4 2 1 2 1 2 2 1 1 1 17 Average 4 1 1 3 1 2 1 0 2 1 0 0 17 Avg % complete 21% 28% 36% 51% 58% 68% 76% 78% 89% 95% 98% 100% 100% 2012* 6 1 1 2 2 2 2 2 2 2 1 23 2012 % complete 26 % 26 % 30 % 35 % 43 % 52 % 61 % 70 % 78 % 87 % 96 % 100 % 100 %
Finland
2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total 5 5 2005 2 5 7 2006 5 1 6 2007 4 1 5 2008 4 1 5 2009 6 1 3 10 2010 1 4 2 2 4 2 14 2011 2 4 2 2 3 2 13 Average 0 1 1 2 2 0 0 0 1 0 1 0 8 Avg % complete 4% 10% 26% 47% 70% 75% 75% 75% 86% 91% 100% 100% 100% 2012* 3 1 2 2 2 2 2 14 2012 % complete 21 % 21 % 21 % 21 % 29 % 43 % 57 % 57 % 71 % 86 % 100 % 100 % 100 %
5.0 5.0 5.0 1.5 3.0 2.5 1.5 1.5 1.5 1.5
Net Issuance
C+R refers to Coupons + Redemptions. See the Weekly Flows table on the following page for more detail over the next six weeks.
Issuance
Gross (RBS forecast) Germany France Italy Spain Netherlands Belgium Austria Finland 124.7 116.5 146.4 53.7 32.0 12.1 12.7 10.6
Net (GC) 107.9 94.4 118.9 47.1 26.1 6.8 8.3 8.9
Net (G-C-R) 10.9 25.2 17.5 23.7 10.9 -15.8 -1.9 2.9
Gross Germany France Italy Spain Netherlands Belgium Austria Finland 66.0 85.0 80.3 48.1 30.8 17.0 10.2 3.0
Net (GC) 48.9 65.6 57.4 33.6 27.2 10.6 7.7 2.4
Net (G-C-R) -11.1 27.9 1.7 3.3 12.9 6.8 5.9 2.4
Germany 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 0.39 19.00 4.61 14.39 5.00 0.23 4.78 4.78
France 9.20 9.20 9.20 10.00 10.00 10.00 11.00 11.00 11.00
Italy 5.30 5.30 5.30 12.00 0.55 0.57 11.45 10.89 8.50 0.97 3.00 7.53 4.53 -
Spain 4.00 4.00 4.00 3.50 3.50 3.50 0.07 0.07 0.07 3.50 3.50 3.50
Austria 0.07 0.07 0.07 2.00 2.00 2.00 0.01 0.01 0.01
Portugal n/a - - n/a - - n/a n/a n/a 1.85 10.16 1.85 12.01 n/a - - -
Greece n/a 0.65 3.33 0.65 3.98 n/a 0.06 0.06 0.06 n/a n/a n/a n/a 0.09 0.09 0.09
Total 24.50 0.71 3.33 23.79 20.45 10.50 0.06 10.44 10.44 12.00 0.55 0.57 11.45 10.89 18.70 18.70 18.70 18.00 3.29 32.16 14.71 17.45 19.50 0.66 18.84 18.84
Date
14-May-12 14-May-12 14-May-12 14-May-12 14-May-12 15-May-12 15-May-12 16-May-12 16-May-12 16-May-12 16-May-12 16-May-12 16-May-12 16-May-12 16-May-12 17-May-12 17-May-12 17-May-12 17-May-12 21-May-12 22-May-12 23-May-12 w/c 28 May 28-May-12 30-May-12 30-May-12 04-Jun-12 06-Jun-12 07-Jun-12 07-Jun-12 08-Jun-12 12-Jun-12 12-Jun-12 12-Jun-12 13-Jun-12 13-Jun-12 14-Jun-12 14-Jun-12 20-Jun-12 21-Jun-12 21-Jun-12 21-Jun-12 21-Jun-12 25-Jun-12 26-Jun-12 26-Jun-12 26-Jun-12 28-Jun-12 03-Jul-12 03-Jul-12 03-Jul-12 04-Jul-12 05-Jul-12 05-Jul-12 10-Jul-12
Country
Italy Italy Italy Italy Finland UK Sweden Germany France France France France France France France Spain Spain Spain UK Belgium Netherlands Germany UK Italy Italy Sweden Belgium Germany Spain France Belgium Netherlands Austria UK Sweden Germany UK Italy Germany Spain France France UK Belgium Netherlands UK Italy Italy Netherlands Austria UK UK Spain France Netherlands
Bucket
3y 10y 10y 15y 5y 15y 10y 2y 3y 5y 5y Linker Linker Linker 3y 3y 5y 2y 3y 2y Linker
Bond
BTPS 2 1/2 03/01/15 BTPS 4 1/4 03/01/20 BTPS 5 03/01/22 BTPS 5 03/01/25 RFGB 1 7/8 04/15/17 UKT 5 03/07/25 DBR 1 3/4 07/04/22 BTNS 0 3/4 09/25/14 FRTR 3 1/2 04/25/15 FRTR 3 1/4 04/25/16 BTNS 1 3/4 02/25/17 FRTR 1.1 07/25/22 FRTR 2.1 07/25/23 FRTR 1.85 07/25/27 SPGB 4.4 01/31/15 SPGB 4 07/30/15 SPGB 3 1/4 04/30/16 UKT 5 09/07/14 OLO Auctions NETHER 0 3/4 04/15/15 13-Jun-14 UKTI 0 3/8 03/22/62 CTZ / BTPei auction Med-long term auction Conventional auction
ISIN
IT0004805070 IT0004536949 IT0004759673 IT0004513641 FI4000029715 GB0030880693 SE0003784461 DE0001135473 FR0120634490 FR0010163543 FR0010288357 FR0120473253 FR0010899765 FR0010585901 FR0011008705 ES0000012916 ES00000123L8 ES00000122X5 GB0031829509 NL0010055703 GB00B4PTCY75
Amt
3.50 0.60 0.60 0.60 1.00 2.75 2.50 5.00 2.50 2.50 1.50 1.50 0.40 0.40 0.40 1.25 1.25 1.50 1.50 2.00 3.50 5.00 4.50 7.50 2.50 2.00 5.00 3.50 10.00 0.20
Amt outst.
8.8 22.8 17.2 20.9 4.0 28.6 72.1 5.0 3.5 23.3 28.0 11.0 14.2 9.3 4.5 20.4 12.0 17.4 37.4 6.4
Comment
E2.5-3.5bn Total size E1.0-1.75bn " "
Re-opening Total size E7-8bn " " " Total size E0.8-1.2bn " " RBS Size Estimate RBS Size Estimate RBS Size Estimate Mini-tender sale RBS Size Estimate Re-opening New issue Syndicated RBS Size Est., TBA 24 May RBS Size Est., TBA 25 May
RBS Size Est., TBA 23 May RBS Size Estimate Re-opening RBS Size Estimate RBS Size Est., TBA 1 June RBS Size Est., ORI
5y, 8y 5y
NETHER 2 1/2 01/15/33 RAGB Auctions UKT 1 09/07/17 Conventional auction 04-Jul-22 UKT 4 01/22/60 Med-long term auction 13-Jun-14 Obligaciones auctions BTAN Auction
NL0010071189 GB00B7F9S958
2.50 2.00
4.2 8.5
35
2.50 5.00 GB00B54QLM75 8.50 5.00 3.50 9.50 1.50 tba 2.00 NL0010060257 GB00B3Y1JG82 4.50 8.00 5.00 3.00 8.5 6.2 16.9
RBS Size Est.,TBA 5 Jun Re-opening TBA 6 Jun RBS Size Est., TBA 11 Jun Re-opening RBS Size Estimate RBS Size Est., TBA 15 Jun RBS Size Est., TBA 15 Jun TBA 12 Jun RBS Size Estimate
OATei Auction New conventional 7/9/22 OLO Auctions NETHER 2 1/4 07/15/22 UKTI 0 1/8 03/22/29 CTZ / BTPei auction Med-long term auction
25
Re-opening TBA 19 Jun RBS Size Est., TBA 22 Jun RBS Size Est., TBA 25 Jun DDA, size probably EUR 4-5bn
5y
New 5y benchmark DSL RAGB Auctions Conventional auction Conventional auction Bono auctions OAT auctions DSL auctions
TBA 29 Jun
Source: Respective DMOs, Bloomberg, RBS
Redemptions
ATS BEF FIM FRF DEM GRD IEP ITL NLG PTE ESP Othr SUM Total C&R 0.07 0.04 3.51 0.07 0.52 0.06 0.09 0.00 0.60 0.51 0.06 0.00 0.01 0.66 34.45 0.26 0.07 0.34 0.09 0.23 0.01 0.10 0.27 0.00 17.57 0.01 0.00 40.71 0.01 19.37 33.44 0.08 0.58 0.09 0.03 16.88 0.04 20.21 0.33 9.32 0.09 0.01 0.11 0.00 3.68
0.07 -
0.18 0.47 0.06 0.09 0.00 0.00 0.08 0.58 0.03 0.00 0.11 0.55
3.33 -
3.33 -
0.34
0.07 -
0.01 0.00 0.03 0.51 0.06 0.00 0.00 0.66 2.29 0.26 0.07 0.34 0.09
19.00 -
0.57 3.00 -
0.08 0.01 -
- 10.1 -
- 32.16 -
0.51 -
17.05 -
- 17.05 -
5.88 -
0.01 0.03 -
10.1 -
16.1 -
27.00 -
15.0 -
- 27.00 -
- 16.15 - 25.19 -
0.09
0.09 0.03
7.34 -
0.01
13.1 -
12.8 -
- 13.19 -
- 12.87 -
0.00
0.00 0.55
3.13
3.13
Open
Stop
Target
Cash Stop
P&L
Write-up
Correlation to FRA/OIS widening risk Failure to resolve crisis pushes EMU CDS higher. Attractive levels and rolls down to -16.3bp in spot. Aided by 5s10s flattening view Long lived funding stress means FRA/OIS continues to remain wide We expect ALM paying in long rates and long slopes to push aggressively higher Alternative to 10s30s 10y forward. Levels driven more inverted by year end REC flows
-2.0k 10.0k
0.0 ticks 98 bp
0.0 ticks 87 bp
10 ticks 200 bp
-7 ticks 65 bp
10 ticks 102 bp
-7 ticks -33 bp
5,000 -110,000
20.6k
16.3 bp
3.5 bp
-16 bp
32 bp
32 bp
-16 bp
125,873
Year End: Trade 4 Year End: Trade 7 Year End: Trade 8 Year End: Trade 10 Year End: Trade 9 Year End: Trade 12
10.6k
34 bp
53 bp
75 bp
20 bp
42 bp
-14 bp
189,437
10.9k
-54 bp
-49 bp
-30 bp
-70 bp
24 bp
-16 bp
54,347
10.7k
-19 bp
-9 bp
10 bp
-43 bp
29 bp
-24 bp
107,846
Favourable carry and fits with our long-end steepening theme Euro 'outs' should outperform euro 'ins'. Denmark should be considered a safe haven. The Euribor curve is steep, and greens and blues are yet to catch the bid that reflects deteriorating Euribor flattener Euro economy Jun-12 Euribor Front euribors rich, interbank bearish options stress to stay high. Rec EUR 6y Richening of the belly should Pay 2f 1y mean levels normalise Long end of the SPGB curve not showing any price differentiation, SPGB 2037 vs. which is likely to change over 2032 2012 If economic improvement and Buy USD 2y2y near-term inflation pressures take payers against hold, the front end of the US EUR should come under pressure first.
10.8k
-29 bp
0 bp
10 bp
-43 bp
39 bp
-14 bp
309,543
-10.0k
-20 bp
-30 bp
-80 bp
40 bp
60 bp
-60 bp
100,000
Sell the ERM3ERM4 Spread Buy 98.875 / sell 98.625 Rec 6y Pay 2f 1y Long SPGB 37s versus 32s on price differential Buy USD 2y2y payers against EUR Buy 1y20y receivers ATM25bp and sell 1y30y receivers ATM-27.5bp Buy 1y5y ATM receivers and sell 1y30y receivers 15bp OTM, DV01 neutral at expiry Buy 1y singlelook 2y/30y capfloors vs 1y30y swaption straddles Pay the belly in the German 2s5s10s Receive Dec-12 ECB OIS
49 bp 6.0 ticks 54 bp
25 bp 0.5 ticks 54 bp
20 bp 25 ticks 40 bp
55 bp 0 ticks 62 bp
29 bp 19 ticks 14 bp
-6 bp
235,000
9.6k
-2.4 bp
-4.4 bp
-40 bp
5 bp
38 bp
-7 bp
- 9,734
0.0k
53 bp
30 bp
50 bp
-25 bp
5,147
0.0k
0.0k
-24 bp
-12 bp
15 bp
-40 bp
39 bp
-16 bp
79,165
Solvency II to steepen long end. QE to depress out to 10 years. Convergence to US curve dynamics. Front end pinned and FRA/OIS may be negatively correlated with long end. 5y is still the sweet spot but we expect a yield grab for 10y Expect long term ECB liquidity to bring down Eonia-deposit rate spread 3m carry and roll is worth 17bp and is the highest on the 1Y forward curve 50y REC flow done. Long-end cheapening in response to Dutch pensions sector & Solvency II. Roll-down makes 52bp over 1 year.
0.0k
0.0k
35 bp
84 bp
95 bp
5 bp
60 bp
-30 bp
380,222
Sell correlation in EUR German 2s5s10s fly Long Dec ECB OIS
0.0k
0.0k
0 vols
-6 vols
15 vols
-10 vols
- 63,088
-19.5k
-43 bp
-47 bp
-25 bp
-50 bp
18 bp
-7 bp
- 63,167
-10.2k
37 bp
27 bp
20 bp
45 bp
17 bp
-8 bp
95,138
Rec EUR 3F1Y Long-end steepener, 40F10Y vs 30F10Y Long belly in EUR 2s5s30s 1Y forward
Rec EUR 3F1Y Long-end steepener, 40F10Y vs 30F10Y Long belly in EUR 2s5s30s 1Y forward
-10.6k
186 bp
149 bp
128 bp
210 bp
58 bp
-24 bp
392,776
-8.7k
-12.0 bp
-26.4 bp
-45 bp
0 bp
33 bp
-12 bp
126,055
20.6k
-3.2 bp
-27.8 bp
-53 bp
-12 bp
50 bp
-9 bp
240,199
Buy ATM payers 6m2y vs sell 6m5y ATM payers Eurodollar vs. Euribor H4/H5 box June-12 expiry mid-curve 2y Euro$ option on EDM4 (98.75/99.5 put spread) Buy Jun-12 Euribor 99.375/99.5 1x2 Call spread Sell the 133/131 RXM2 put spread; buy the TYM2 126/124 put spread
Sell 83 RXM2 and buy EUR10m DBR 3.25% 2021 Buy the 2RM2 98.875/99.00 Call spread for 1 tick Buy the Jun13Jun14 Euribor flattener vs. the Short Sterling steepener Buy the June 12 Bobl (OEM2) 122.75/122.00 1 x 2 put spread and receive 1 tick credit (ref OEM2 price = 123.50) Buy the June12 Bund (RXM2) 138/139/140 call ladder and receive 7 ticks (ref RXM2 price = 137.16). 2F2Y and 4F5Y vs 2F7Y ATM straddle triangle, rec 172bp upfront
BTPs 2s10s flattener Sell SPGB 3.15% 2016, carry is -7.6bp over 3m Buy the ERM2 99.375 Call; Sell the ERM2 99.25 Put Buy the 0RM2 99.25/99.375 1x2 Call spread; sell the 0RM2 98.875 Put
Buy ATM payers 6m2y vs sell 6m5y ATM 2s5s bearish flatttening payers Current box spread too small a Buy EDH4, sell premium if the recovery is for real. EDH5, sell Bearish Euribor Blues - we expect ERH4, buy EMU problems to dominate. ERH5 June-12 expiry mid-curve 2y Euro$ option on To hedge our view of the EDM4 European lower-for-longer being (98.75/99.5 put only curtailed by a US recovery spread) Too much liquidity in the system Buy Jun-12 to be ignored, so 3m Euribor Euribor fixings should continue to drift 99.375/99.5 1x2 lower. Call spread If there is going to be an upside Sell the 133/131 surprise in growth it will come RXM2 put from the US not Europe. This spread; buy the trade offers bear protection at the TYM2 126/124 long end. put spread The DBR 3.25% 2021 will become CTD for RXM2 in a 20bp Sell 83 RXM2 steepening sell-off at 10y. The bond is likely to richen vs. RXM2; and buy a cheap insurance trade against EUR10m DBR further sell-off. 3.25% 2021 Fade the richness in Euribor vol. Buy the 2RM2 Look for low yields in green 98.875/99.00 Euribors while staying short vol Call spread for via cheap options. 1 tick Buy the Jun13Jun14 Euribor Short sterling seems prone to a flattener vs. the market sell-off. Box trade less Short Sterling volatile. steepener Buy the June 12 Bobl (OEM2) 122.75/122.00 1 Expect Bobl futures vol to fall x 2 put spread further. A cheap insurance trade; and receive 1 DEM5y remains quite rich vs. 2y tick credit (ref and 10y and could be vulnerable OEM2 price = in the event of a correction. 123.50) Buy the June12 Bund Expect Bund futures vol to fall (RXM2) further. We anticipate less noise 138/139/140 in EGBs for the short term, while call ladder and overall weakness will likely receive 7 ticks support a slow grind to lower bund (ref RXM2 price yields. = 137.16). Buy 2y7y vs sell 2y2y and 4y5y This triangle is extreme and ATM straddles, normally trades cheap at low equal notional levels of volatility. for net 10k vega Solvency II use of 20y as last liquid point and extrapolation to UFR is on track and should Sell 6m30y reduce long end hedging needs 2.595% strike receivers dramatically. Re-entering at full risk. The remaining firepower from the Sell 2.25% LTRO is likely to be lower than we 2013 Buy 5% expected. 2022 BTPs End of the carry trade; the belly of the curve should be the early loser.
1.6k
-0.2 bp
0.1 bp
30 bp
-15 bp
63,551
Weekly 10 Feb 12
-10.0k
3 bp
10 bp
23 bp
-6 bp
20 bp
-20 bp
63,040
Weekly 17 Feb 12
-0.2k
2.0 ticks
0.1 ticks
- 19,328
Weekly 9 Mar-12
2.1k
-1.0 ticks
0 ticks
7,500
Weekly 16 Mar-12
-0.5k
-1.6 bp
-0.6 bp
9,535
Weekly 16 Mar-12
-9.4k
4 bp
7 bp
16 bp
-1 bp
12 bp
-5 bp
9,892
Weekly 16 Mar-12
13.2k
-1.0 ticks
-4.5 ticks
- 35,000
Weekly 23 Mar-12
10.4k
8 bp
1 bp
-10 bp
18 bp
18 bp
-17 bp
60,673
Weekly 23 Mar-12
-0.4k
1.0 ticks
1.4 ticks
4,000
Special 27 Mar-12
7.0 ticks
-64.6 ticks
-716,000
Special 27 Mar-12
-13.2k
33.7k
0 bp
-7 bp
- 65,423
-5.4k
31.6k
0 bp
-11 bp
-110,842
-9.5k
256 bp
286 bp
150 bp
350 bp
106 bp
-94 bp
-391,551
Weekly 30 Mar-12
Sell SPGB 3.15% 2016 Buy ERM2C 99.375, Sell ERM2P 99.25 Buy 1x2 0RM2C 99.25/375 sell 0RM2P 99.25
9.4k
371 bp
444 bp
700 bp
340 bp
329 bp
-31 bp
579,441
Weekly 30 Mar-12
-2.9k
0.0 ticks
-2.3 ticks
- 22,500
Weekly 30 Mar-12
Reds and greens in Euribor are still very cheap, and vol is rich. Euribor reds and greens have Dec-14 Euribor strongly underperformed vs. the Buy 1000 vs. Jun-12 Bobl DEM 2y and 5y sectors, which are ERZ4, sell 450 futures almost at record low yield levels OeM2 Buy DBR 2.25% Net carry and Sep 2021 vs. Extension trade; DBR 2.25% Sep rolldown is DBR 2.5% Jan 2021 is cheap on the curve. neutral
-6.7k
0.0 ticks
1.0 ticks
10,000
Weekly 30 Mar-12
24.7k
65 bp
65 bp
40 bp
74 bp
25 bp
-9 bp
21,500
10.1k
14 bp
13 bp
8 bp
18 bp
6 bp
-3 bp
9,624
2021 DUN2 110.8/111.0 1x2 call spread, cost 1 tick Sell BTP 4.5% 2026, buy SPGB 5.9% 2026 Buy NETHER 3.25% 2015, sell RFGB 4.25% 2015 TECHNICAL TRADE: Sell 5y Spain Sell 1y midcurve ATM straddle on Dec13 Euribor; buy the 2y on Dec14 Euribor Trading the negative yield view in 2y Germany; expect tensions to build more seriously around midyear. Weaker Italian budget targets will see more speculation on eventual bailout risk; also trade to catch index shifts Budget consolidation effort and continued domestic support + demand from intl investors looking for core Euro risk with a pick-up. Pullback level 4.53% seen in generic yield 18 Apr. A possible short-term relief to the 200d moving average should be faded. July option expiry on Schatz Sep-12 future
1.3k
-1.0 ticks
-0.4 ticks
6,000
Weekly 13 Apr-12
-9.9k
48 bp
58 bp
10 bp
85 bp
38 bp
-37 bp
- 88,777
Special 19 Apr-12
-9.9k
5 bp
6 bp
-5 bp
10 bp
10 bp
5 bp
- 5,117
Special 19 Apr-12
9.8k
471 bp
509 bp
538 bp
425 bp
67 bp
-46 bp
318,569
Weekly 13 Apr-12
Play the relative movement between the two contracts and volatility within the calendar spread. Net cost 15 ticks ECB risk premium rising vs. USD. Buy Sep-13 ECB easing will be a strong lowerIMM dated EUR for-longer message - failure to OIS vs. USD ease will fwd risk premium fall; US OIS data is better than EMU Non-directional fly trade Rec 2F2Y Pay opportunity; 4y is cheap and 4F2Y 4F2Y (2s4s6s too low given the level of the fly) 2F2Y. Buy OAT 3.75% 2021 on fly vs. Correlation between the fly and 4.25% 2018 the French 5s10s suggests the and 4.25% OAT 3.75% 2021 is too cheap on 2023 the fly vs the 2018 and the 2023 Bund ASW widener boxed with OBL ASW tightening, using futures
Buy 0RZ2C & 0RZ2P 99.125; Sell 2RZ2C & 2RZ2P 98.625
4.2k
15 bp
10 bp
- 4,400
Weekly 20 Apr-12
10.0k
29 bp
19 bp
10 bp
34 bp
19 bp
5 bp
103,750
Weekly 20 Apr-12
Buy RFGB 2.75% 2028 vs. DSL 5.5% 2028 Short 10y France vs. Germany
Rec EUR 5F5Y, Pay CHF 5F5Y Buy Jun13/14 Euribor steepener
Roll is 0.7bpover 3m Duration weighted (0.64: 1.0: 0.4); 3m carry is around +1.5bp Buy RXM2, sell Regime shift based on collateral OEM2, rec 5y, value and non-resident buying pay 10y means the German curve should (maturity to continue to richen in ASW on a matched rolling basis. swaps) Higher duration supply in the Netherlands is expected to weigh Sell Nether on the Dutch long end while the 2.25% 2022 vs. French curve is too steep in 5s10s 4.5% 2017; Buy owing to overseas buying of the FRTR 3% 2022 5y sector, which we expect to vs. BTNS dissipate. 1.75% 2017 Finland rated higher in our EGB risk index & RFGB 28s are highest pick up to DSLs, where Finland typically trades tighter. Insurer liability discounting curve changes / Solvency II negative for Dutch long end. Carry is neutral Re-entering after taking profit before the French election. Our more aggressive targets simply Sell 10y FRTR reflect our view on the Euro crisis. vs. 10y Bunds 3m carry and Term premium in EMU still too roll is 2bp in high. EMU growth likely to favour of the underperform US. trade EUR 5y5y is trading at the cheap end of its long term relationship with CHF. Higher vol in EUR means best risk-reward is through Beta of 1.2 on the CHF leg a beta-weighted spread. Z-score is -2.2, indicating the spread is cheap and offers a good Buy ERM3 Sell buying opportunity in our view. ERM4 Vol is cheap. We are targeting a sharp break-out from current tight ranges. 25th May expiry should Buy RXM2C 142.00 & capture the 'hot' aftermath of the RXM2P 142.00 Greek and French elections. Solvency II requires different discount curve assumptions in EUR and GBP Increasingly likelihood that the current 50bn of QE will be the last. The steepening pressure on the announcement may just be the start. Receive GBP 20F10Y, Pay EUR 20F10Y
10.2k
87 bp
83 bp
105 bp
80 bp
18 bp
-7 bp
- 44,546
Weekly 20 Apr-12
10.1k
37.2 bp
29.4 bp
12 bp
45 bp
25 bp
-8 bp
78,866
Weekly 27 Apr-12
10.1k
15.1 bp
18.9 bp
0 bp
21 bp
15 bp
-6 bp
15,823
Weekly 27 Apr-12
-10.0k
34.3 bp
27.7 bp
20 bp
40 bp
14 bp
-6 bp
66,491
Weekly 27 Apr-12
10.2k
6 bp
6 bp
-5 bp
11 bp
11 bp
-5 bp
1,633
Weekly 27 Apr-12
-10.0k
135 bp
136 bp
200 bp
100 bp
65 bp
-35 bp
14,442
Weekly 4 May-12
9.9k
-17 bp
-25 bp
-50 bp
0 bp
33 bp
-17 bp
82,097
Weekly 4 May-12
12.1k
92 bp
84 bp
60 bp
110 bp
32 bp
-18 bp
79,821
10.0k
26 bp
25 bp
40 bp
18 bp
-14 bp
8 bp
- 5,000
14.2k
-155.0 ticks
-156.6 ticks
- 16,000
Weekly 4 May-12
GBP
Receive GBP 20F10Y, Pay EUR 20F10Y 12.0k 115 bp 164 bp 60 bp 170 bp 55 bp -55 bp 23,120 Solvency II Trades
0.0k
0.0k
67 bp
81 bp
25 bp
-15 bp
163,582
Weekly 10 Feb 12
Inverted front end SS curve does not fit BoE rate expectations. We favour richening in L M3 and LM4. UK budget to provide further Sell the FRTR reassurance - and election risks in 4.5% 2041, buy France mean non-negligible UKT 4.5% 2042 probability of French downgrade Alternative to ASW, to take Long UKT advantage of the steepness of the 4.75% 2030 vs. Gilt curve. Spread between the 2 UKT 3.75% bonds is the statistically widest on 2020 the curve. Rec GBP 3F6Y A cheap hedge against rate hike vs. Pay GBP premium. Spread close to 5F1y historical highs. Buy GBP 2y5y vs 5y5y and Bearish vol trade (flat parallel 2y2y vega) Buy the 2RM2 98.875/99.00 Call spread; sell the 2LM2 Vol is high and Short Sterling 98.75/98.875 remains vulnerable to a sell-off, Call spread for while Euribor is predisposed to rally even more. 1 tick Sell the basis Short basis position. 22s become on the UKT 4% CTD in a 15-20bp market rally; 2022 (sell bond, should also cheapen when the buy future) new 10y Gilt is launched. Short Sterling Condor
Sell LM2-LM3LM4-LM5 Condor Sell the FRTR 4.5% 2041, buy UKT 4.5% 2042
-10.4k
44 bp
17 bp
10 bp
60 bp
34 bp
-16 bp
279,735
Weekly 13 Jan-12
10.3k
-28 bp
-29 bp
-60 bp
0 bp
32 bp
-28 bp
12,426
Long UKT 4.75% 2030 vs. UKT 3.75% 2020 Rec GBP 3F6Y vs. Pay GBP 5F1y Buy GBP 2y5y vs 5y5y and 2y2y Buy the 2RM2 98.875/99.00 Call spread; sell the 2LM2 98.75/98.875 Call spread for 1 tick Sell the UKT 4% 2022, buy the Jun-12 Long Gilt future Buy UKT 4% Volatility protection - buy the basis 2022, buy UKT Synthetic on the UKT 4% 2022 and the 5% 5% 2025, Sell straddle; long 2025 by buying the bonds and Jun-12 Long basis selling the Jun-12 Long Gilt future Gilt Buy 5y10y Bearish vol exposure. Regression against 5y5y residual is at high and standard and 10y5y ATM triangle is equivalent to regression Receive 208bp premium straddles weighting. Buy GBP 3y10y EUR vol looks high compared to Buy GBP 3y10y payers against GBP. GBP rates are more likely to payers against EUR be in play at this horizon. EUR With the long end very steep and QE surely priced out completely Buy 6m10y ATM payers sell for now, further upward pressure 10s30s bearish on yields must be a traditional 6m30y ATM flattening bearish flattener. payers Sell GBP 30y Sell GBP 30y ASW have traced a clearly benchmk, ASW on a yield- defined range since QE restarted receive 30y yield basis in October, in middle now swap Offers good risk-reward as any further less dovish/more hawkish Pay Feb-12 BoE rhetoric drives up rate Pay Feb-12 MPC Sonia expectations. MPC Sonia Buy 10y Australia is yet to adjust to the Buy Jun-12 10y Australia vs. UK new low growth/low bond yields Australia in futures normal and if UK QE is off the (XMM2); sell (hedge ratio table we expect 10y Austrlia to Jun-12 Long 518:1000) continue outperforming the UK Gilt
-10.9k
107 bp
114 bp
90 bp
120 bp
17 bp
-13 bp
- 69,741
13.0k
14 bp
16 bp
5 bp
20 bp
9 bp
-6 bp
- 20,351
-3.6k
10.0k
0 bp
-1 bp
100 bp
-40 bp
- 1,478
-1.1k
-1.0 ticks
3.4 ticks
43,778
Weekly 30 Mar-12
10.2k
41 bp
39 bp
813
Weekly 13 Apr-12
-0.7k
10.0k
197 bp
194 bp
3,445
Weekly 13 Apr-12
-0.8k
10.0k
208 bp
218 bp
30 bp
-10 bp
-100,000
7.3k
0.0 bp
20.0 bp
20 bp
10 bp
200,000
-5.0k
-8.0 bp
-10.8 bp
30 bp
-10 bp
- 27,575
Weekly 20 Apr-12
10.3k
12 bp
10 bp
22 bp
5 bp
10 bp
-7 bp
- 13,016
Weekly 20 Apr-12
10.0k
56 bp
51 bp
75 bp
50 bp
19 bp
-6 bp
- 47,000
Weekly 20 Apr-12
10.3k
107 bp
87 bp
75 bp
120 bp
32 bp
-13 bp
34,539
Weekly 27 Apr-12
SEK
2y4y SEK steepener vs. USD flattener Post-Riksbank decision the spread in relative steepeness is 23bp, time to get onboard again. Hard to see continued surge in Swedish yields without also affecting UK yields. Limited downside, good risk-reward. Cheap hedge against a big delta move. Flatteners between front to 3rd contracts look attractive as the Riksbank regards the economy as improving and is unlikely to cut in April. Rec SEK 2y, pay SEK 4y, pay USD 2y, rec USD 4y Weekly 17 Feb 12
-10.4k
23 bp
26 bp
10 bp
40 bp
13 bp
-17 bp
- 29,921
-9.3k
70.5 bp
56.7 bp
50 bp
90 bp
20 bp
-20 bp
98,055
Weekly 16 Mar-12
Sell (Rec) Dec12 RIBA vs. Jun-12 RIBA Pay 10y HICPx, receive 5y HICPx swaps Buy Jul-13 TIPS vs 3.375 Jul-13 Treasuries Buy Feb-42s vs Jan-22s on breakeven
9.8k
-13.0 bp
-34.7 bp
-40 bp
5 bp
27 bp
-18 bp
212,338
Weekly 30 Mar-12
Inflation
Pay 10y HICPx, receive 5y HICPx swaps Long 2y TIPS breakeven inflation 5y5y HICPx looks too high both fundamentally and historically. TIPS look good value compared to our forecasts after a big pullback. Carry is positive. Too little risk premium. Should do well if breakevens fall. 10y supply this week and in May before 30y supply. -10.1k 248 bp 232 bp 210 bp 260 bp 38 bp -12 bp 45,750 Weekly 24 Feb 12 Linked-Up 21 Mar 12
9.1k
269 bp
188 bp
80 bp
-40 bp
-346,601
-10.5k -10.7k
10 bp -2 bp
13 bp 5 bp
36 bp 8 bp
4 bp -7 bp
26 bp 10 bp
-6 bp -5 bp
- 23,759 74,954
breakeven steepening
Long 3y in 7y Italy real yield Long French vs European inflation in 5y bonds Buy OATei20s out of 15s breakevens for equal cash amounts. Entry spread 60bp in forwards. 5s10s30s TIPS breakeven butterfly, short middle. Buy Jan-17 TIPS, sell Jul-21 TIPS, Buy Feb42s
and against swaps. Syndication risk lull in ultra-long now. 6% real yield looks very attractive when nominal yields are close to this level and Italian fundamentals are improving. French inflation has cheapened a long way. Hollande proposes to double Livret-A allowance.
vs IL42 b/e
21 Mar 12
-9.8k
5.803%
5.443%
4.303%
6.303 %
150 bp
-50 bp
429,691
Long BTANi16 vs OATei15 Pay inflation in 10y and receive in 5y for equal notionals. Duration neutral package,
9.7k
71 bp
61 bp
30 bp
-15 bp
- 15,686
Weekly: April-5
Adding to short 5y5y HICPx swaps outright recommendation by doing it as a spread against a cash-for-cash extension in bond breakevens.
8.3k
60 bp
75 bp
30 bp
75 bp
30 bp
-15 bp
-150,000
Weekly 20 Apr-12
Long end is too flat and we are now in the lead up to 10y supply. As we near the target on this trade, conviction is reduced, but SMP restart risk and Italy downgrade risk both appear somewhat remote and I expect shorts to find the negative carry painful in the meantime.
-10.2k
21 bp
17 bp
36 bp
14 bp
15 bp
-7 bp
61,154
Linked-Up 28 Mar 12
-10.0k
-90 bp
-103 bp
-125 bp
-70 bp
35 bp
-20 bp
223,134
Weekly 27 Apr-12
Other
Sell IRZ2, buy Dec-12/13 Markets are pricing in too much IRZ3. Carry/roll flattener in RBA easing. Dec-12 is the richest is in your favour Australia 3m bill part of the curve; z-score is 1.78, by 17bp over Weekly 27 futures a sell signal. 3m 9.9k 28 bp 31 bp 12 bp 34 bp 16 bp -6 bp - 29,788 Apr-12 *Current level is yield for bonds. For swaps, the current level is starting rate adjusted for P&L in bp running. **Year End refers to European Rates Year Ahead, published 12-12-11
8,000,000
6,000,000
4,000,000
2,000,000
- 2,000,000 13-Jan-12 27-Jan-12 10-Feb-12 24-Feb-12 9-Mar-12 23-Mar-12 6-Apr-12 20-Apr-12 4-May-12
Source: RBS, Bloomberg, GDS
Macro Forecasts
Official rate forecasts
Latest US BoJ ECB UKMPC Sweden Norway Denmark China India Korea CzechRep Hungary Poland 0.07 0.10 1.00 0.50 1.50 1.50 0.70 6.6 8.50 3.25 0.75 7.00 4.50 Q2(12) Q4(12) 0-0.25 0-0.10 0.75 0.50 1.50 1.50 0.50 6.6 8.25 3.25 0.75 6.50 4.50 0-0.25 0-0.10 0.50 0.50 0.50 1.00 0.25 6.8 7.75 3.25 0.75 6.00 4.50 GDP US Eurozone Germany France Italy Spain UK Japan Latest Rates per US dollar JPY GBP* CHF AUD* CAD ZAR SGD KRW CNY BRL USD JPY GBP CHF SEK NOK PLN CZK HUF 80.0 1.61 0.93 1.00 1.00 8.11 1.25 1147 6.31 1.95 1.29 103.4 0.80 1.20 9.0 7.59 4.25 25.2 290 82.0 1.58 0.95 1.02 0.96 7.20 1.24 1130 6.25 1.85 1.26 103.3 0.80 1.20 8.9 7.55 4.00 24.2 310 82.0 1.62 0.91 1.08 0.98 7.00 1.22 1110
Source: RBS Economics, Consensus Economics Inc. Survey (10-04-12)
FX forecasts
Q2(12) Q4(12)
6.15 1.85 1.33 109.1 0.82 1.21 8.9 7.50 4.00 24.0 300 Germany US 2y 5y 10y 30y 2y 5y 10y 30y Japan UK 2y 10y 2y 5y 10y 30y
Commodity forecasts
Unit Latest Platinum Palladium Copper Zinc Nickel Lead US$/t US$/t US$/t US$/oz 1463 605 8105 1969 2100 Q2(12) 1595 675 8275 2000 18330 2100 Q4(12) 1750 800 8600 2150 20000 2250
US$/t 17170
*US Dollar per currency unit Source: Bloomberg, RBS FX Desk Strategy
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