Buy SGBi3107 vs SGB1051 in a BEI spread, hedge by rec. 4y EUR swaps @ 34bp (145bp and 1.11%). P/L: 65bp/15bp. Carry: +12bp/3m (our CPI forecast). Half the risk in the EUR swap.
Short-end BEIs are cheap, risks stem from big declines in nominal (EUR) rates
The BEI rate of SGBi3105 is some 50bp too cheap relative to our forecast (regardless of considering CPI or implied CPIF). Moreover, the market implied pricing of CPIF suggests that between 2015 and 2017 the average annual CPIF rate will be at the lowest ever recorded over a two-year period. This seems very stretched to us and signals the cheapness of the short BEIs. A couple of weeks ago we booked profit in the BEI spread SGB3107/SGB1051 @ 155bp. Now, the pricing is down to 145bp despite the strong demand at last week’s auction in the SGBi3107.
This highlights the risk associated with the BEI rate trade. Despite a significant deviation between our inflation forecast and market pricing, plummeting interest rates could jeopardise the trade. We believe such a decline in short-end rates going forward should originate from the EUR money market. Amid recent ECB reasoning, we think this is the market where we find the rise in interest rates as least warranted. The rise in EUR rates since the beginning of May seems overdone, the 3Y EUR swap rate is, for instance, up roughly 70bp.
To Read the Entire Report Please Click on the pdf File Below.
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Buy Short-End BEIs
Published 09/17/2013, 07:17 AM
Updated 05/14/2017, 06:45 AM
Buy Short-End BEIs
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