1、|FOCUS 23/01/2019 1 We book profits on our long 10y OAT vs DSL(+7bp)and keep our short OAT invoice spread at 22bp targeting low 10s.Current:20.5bp.On peripherals:-we keep our long 10y Bono vs OAT(Bono July 28 vs OAT Nov 28)initiated at 72bp,targeting 60bp.Stop:78bp.Carry:+0.6bp/month.Current:68bp an
2、d our Bono 7s15s ASW flatteners entered at 47bp,targeting 35bp.Current:43bp.-we enter BTP 3s5s flatteners(Nov 21 vs Sep 24)at 117bp.Target:100bp.Carry:-0.2bp/month TRADE IDEA FOCUS|EUROZONE 23 January 2019 Go for carry!KEY MESSAGES Following the recent outperformance of non-core EGBs,we updated our
3、EGB credit curve approach.For core,30y ATS ASW is trading very cheap.We book profits on long 10y OAT vs DSL.For non-core,5y BTP ASW vs spline is now cheaper than the 3y bucket making 3s5s BTP flatteners attractive.The Irish ASW curve is the opposite of the Bono curve with the 30y Irish being very ex
4、pensive.We do not expect rating changes for core and semi-core countries in Q1-2019.Following the 70bp tightening in the 10y BTP/Bund spread since late November,we updated our EGB credit curve approach to gauge the valuation on EGBs ASW.As Figures 1 and 2 below illustrate,after a sharp steepening fr
5、om April to late November,the EGB credit curve has flattened over the past couple of months.Thus,weak stock indices in December did not prevent the EGB credit curve from flattening(sensitivity of 10y BBB rates ASW to a+1/-1 notch average rating change fell from 50bp to 35bp).On the contrary,it remai
6、ns far above late April 2018 lows.Figure 3 on the next page provides a summary of 5y to 30y EGB ASW vs spline gap and the 1y z-score.Please refer to important information and MAR disclosures at the end of this report Fig.1:EGB credit curve:late November vs current Fig.2:A flatter credit curve since
7、late November Source:BNP Paribas Source:BNP Paribas G10 INTEREST RATES Eric Oynoyan,G10 Rates Strategist,Europe|Agne Stengeryte,G10 Rates Strategist,Europe|BNP Paribas London Branch|FOCUS 23/01/2019 2 At current levels,the 5y BTP ASW is around 95bp higher than the 3y one and the 10y BTP ASW would be
8、 consistent with a cumulative 4.5 notches rating downgrade from a peak of six notches in Q4 2018(see Figure 7).We think that it is still pessimistic(see the rating section)and is likely to get repriced further ie a richer BTP.Moreover,with global central banks on the dovish side and domestic investo
9、rs being overweight the short end of the BTP curve since Q2 2018,we expect gradual switches out of the 2y/3y area into the belly of the curve.It should lead to a bull flattening of the 3s5s BTP segment.In terms of trade,we would prefer selling BTP Nov 21 into Sep 24 at a spread of 117bp and on any m
10、ove to 123bp.Target:100bp.1m carry:-0.2bp.Stop:127bp.More aggressive investors could initiate the long BTP 5y vs 3y notional for notional entering a long 3y5y forward BTP.Bonos:Regarding Bono ASWs,the 5y and 10y buckets,which were still quite expensive vs the spline curve in Q4,have almost fully cor
11、rected and are now trading close to the spline curve ie,not pricing in any potential ratings upgrade.Above the 10y bucket,Bono ASW are trading at or above the EGB credit curve(ie,cheap,see Figure 8).In terms of trade,we still like the Bono 7s15s ASW flattener entered at 47bp.Target:35bp.Irish:As far
12、 as Irish ASWs are concerned,with the exception of the 5y bucket,which has stabilised on the cheap side,all the longer buckets are trading below the EGB credit curve.At current level,the 10y Irish ASW is consistent with expectations of a one notch rating upgrade.The 30y ASW is even more out of line
13、and is the richest vs the spline curve among all the EGBs both core and non-core.Being long Spain on the 10y bucket,we do not consider adding the long 30y Spain vs Ireland.However,for investors long 30y Irish,it might make sense to switch.Core/semi-core Figure 4 shows the time series of 10y core/sem
14、i-core EGB ASW versus the spline curve where we compare EGB ASW vs their average rating.We saw diverging dynamics between a richer 10y Fin or stable DSL ASW and cheaper OATs/Olos in Q4-2018.It allowed us to enter long 10y OATs versus DSLs on 8 January at attractive levels(ie,30bp on DSL July 2028 vs
15、 OAT May 2028).It is worth noting that on the 5y bucket,the olo ASW is not trading cheap versus the spline curve.DSLs ASW are trading above the spline curve only on the 15y bucket,which could be explained by the likely launch of a new 15y DSL green bond.Regarding the very long end of the curve,30y O
16、los and ATS are the most out of line versus the spline curve,around 20bp cheaper(see Figure 5 for the 30y ATS ASW).OATs come third.In terms of trade,after the two weeks of OAT outperformance,we prefer booking profits on the long 10y OAT vs DSL(+7bp).We keep our short OAT invoice spread initiated at
17、22bp,targeting low 10s.Peripherals BTPs:value on 3s5s flatteners As far as BTP ASWs are concerned,in addition to the overall repricing versus the EGB credit curve(10y BTP ASW has corrected 40%of its record gap to the EGB credit curve),the most impressive move is the relative cheapening of the 5y+ver
18、sus the 3y bucket(see Figure 7).The latter tended to be the cheapest vs the spline curve and is now 15bp richer than the 5y bucket.The BTP curve steepened in Q4 due to a change in investors perception regarding Italian debt sustainability.That move has stopped over the past weeks.EGBs ASW vs spline
19、curve G10 INTEREST RATES Fig.3:EGB credit curve:Observed ASW vs spline Source:BNP Paribas Eric Oynoyan,G10 Rates Strategist,Europe|Agne Stengeryte,G10 Rates Strategist,Europe|BNP Paribas London Branch GermanyNetherlandsAustriaFinlandFranceBelgiumIrelandSloveniaSpainItalyPortugal5y-9.8-3.97.36.95.90.
20、93.7-21.0-4.460.0-45.510y-18.8-1.49.25.38.614.7-7.0-25.1-1.958.2-41.915y-27.52.315.05.37.817.2-10.4-25.20.151.5-36.030y-13.3-14.820.2-4.016.422.6-23.3-22.08.719.5-10.05y0.2-0.20.80.2-0.40.11.0-0.20.80.3-0.610y-0.10.50.40.5-0.40.4-0.2-0.71.00.8-1.015y-1.21.20.70.4-0.51.3-0.7-0.30.20.9-1.130y-0.7-0.72
21、.00.9-0.41.6-1.8-0.30.30.7-0.75y-2.6-3.91.70.11.44.58.2-4.97.0-16.24.710y-4.7-0.7-0.6-0.44.36.72.8-6.45.8-1.3-5.515y-7.71.60.80.42.97.7-0.9-0.70.52.7-6.730y-3.8-2.26.72.7-5.06.9-6.9-2.62.111.0-8.9current gap vs spline(bp)Z-score vs 12m av gap to splinecurrent gap vs 12m av gap to spline|FOCUS 23/01/
22、2019 3 EGBs ASW vs spline curve Fig.4:Core/semi-core 10y ASW vs spline curve Fig.5:30y ATS ASW very cheap Source:BNP Paribas Source:BNP Paribas Fig.8:Bono ASW vs spline curve:cheapening in Q4 Fig.9:Irish ASW vs spline curve:diverging 5y and 30y Source:BNP Paribas Source:BNP Paribas Fig.6:BTP ASW vs
23、spline curve:5y cheaper than 3y now Fig.7:Implied BTP cumulative notches rating downgrade Source:BNP Paribas Source:BNP Paribas G10 INTEREST RATES Eric Oynoyan,G10 Rates Strategist,Europe|Agne Stengeryte,G10 Rates Strategist,Europe|BNP Paribas London Branch|FOCUS 23/01/2019 4 France:Yellow vest prot
24、ests to have limited impact on rating trajectory;agencies to remain on hold for now.Fitch affirmed Frances rating on 18 January,expecting the budget deficit to fall below 3%of GDP in 2020,but convergence towards the medium term objective to be challenging.Risks stemming from high debt levels are exp
25、ected to prevail for a longer period as GGGD/GDP ratio is expected to remain stable until 2021 and decline only slowly thereafter,remaining above 95%over the next decade.When initiating a positive outlook in May 2018,Moodys noted that it was unlikely to consider the possibility of a rating upgrade u
26、ntil the end of 2019 or early 2020 whilst the outlook would likely be returned to stable if the governments reform momentum were to falter or if implementation fell quite short of its plans.We expect Moodys to remain on hold on 3 May.Italy:DBRS affirmed Italy on 11 January and we expect the other ag
27、encies to follow suit in H1 2019.According to DBRS,the 11 January confirmation of the stable trend reflected the combination of(1)the governments downward revision of fiscal targets and avoidance of an excessive deficit procedure by the EC;and(2)progress in reducing NPLs by domestic banks.DBRS main
28、concerns lie in the lack of government focus on structural issues amid slowing economic growth and a fiscal outlook that will become more challenging in 2020.It also sees the possibility of a government reshuffle or early snap election.We think thiis could pave the way for a new government with a mo
29、re moderate agenda.We expect Fitch(22 February)and S&P(26 April),both of which hold a negative outlook,and Moodys(15 March)to echo DBRS thinking.Spain:Following a 1-notch ratings upgrade by each agency in H1 2018,we expect no change for now.Fitch affirmed Spains rating on 11 January,mentioning a hig
30、h value-added and diversified economy,extremely low average yield at issuance,negligible share of foreign-currency debt and governance indicators in line with the A median as key factors supporting the rating.On the negative side,Fitch highlighted the stock of general government debt,which remains v
31、ery large;weak fiscal adjustment among the highest of Fitch-rated countries external leverage;political risk and uncertainty around resolution of the Catalonian regional governments policy of pursuing independence;and a still high unemployment rate.While the economy remains resilient,structural refo
32、rms are lacking and the country faces the possibility of new elections.Hence we expect S&P(22 March),DBRS(22 March)and Moodys(24 May)to affirm their ratings.See Fig.10 for credit ratings snapshot and Fig.11 for H1 rating reviews schedule in France,Italy and Spain.H1 rating review outlook:France,Ital
33、y and Spain G10 INTEREST RATES Fig.10:Credit rating snapshot Sources:BNP Paribas,S&P,Moodys,Fitch,DBRS.*We assign a 1 per notch for an upgrade/downgrade,a 0.25 for a change in the outlook(negative/positive)and 0.50 for a credit-watch(insertion/removal).Eric Oynoyan,G10 Rates Strategist,Europe|Agne S
34、tengeryte,G10 Rates Strategist,Europe|BNP Paribas London Branch Fig.11:H1 rating reviews schedule for France,Italy and Spain Sources:BNP Paribas,S&P,Moodys,Fitch.Jan Feb March Apr May Jun FRA 18th(Fitch)5th(S&P)26th(DBRS)3rd(Moodys)14th(Fitch)ITA 11th(DBRS)22nd(Fitch)15th(Moodys)26th(S&P)SPA 11th(Fi
35、tch)22nd(DBRS)22nd(S&P)24th(Moodys)21st(Fitch)RatingOutlookNext ReviewLastRatingOutlookNext ReviewLastRatingOutlookNext ReviewLastRatingOutlookNext ReviewLastGermanyAAAStable12-Apr0.00AaaStable25-Jan0.00AAAStable25-Jan0.00AAAStable07-Jun0.00FinlandAA+Stable15-Mar0.00Aa1Stable01-Feb0.00AA+Positive01-
36、Feb0.25AA-HStable17-May0.00NetherlandsAAAStable17-May0.00AaaStable22-Feb0.00AAAStable26-Apr0.00AAAStable25-Jan0.00AustriaAA+Stable15-Mar0.00Aa1Stable22-Mar0.00AA+Positive31-May0.00AAAStable15-Feb0.00FranceAAStable05-Apr0.00Aa2Positive03-May0.00AAStable14-Jun0.00AAAStable26-Apr0.00BelgiumAAStable22-M
37、ar0.00Aa3Stable19-Apr0.00AA-Stable05-Apr0.00AA-HStable15-Feb0.00ItalyBBBNegative26-Apr-0.25Baa3Stable15-Mar-1.00BBBNegative22-Feb-0.25BBB-HStable12-Jul0.00IrelandA+Stable31-May0.00A2Stable08-Feb0.00A+Stable17-May0.00A-HStable01-Feb0.00SpainA-Positive22-Mar0.00Baa1Stable24-May0.00A-Stable21-Jun0.00AS
38、table22-Mar0.00PortugalBBB-Positive15-Mar0.25Baa3Stable15-Feb1.00BBBStable24-May0.00BBBStable05-Apr0.00GreeceB+Positive26-Apr0.00B3Positive01-Mar0.00BB-Stable08-Feb2.00B-HPositive03-May0.00FitchMoodysS&PDBRS Legal Notice This document has been written by our Strategist and Economist teams within the
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