Over the past week, we have reached our profit targets on a number of recommendations (see below). We choose to close the positions. Also, last week we reduced the risk exposure in a number of recommendations. This means that we are left with relatively few active trading recommendations and generally a modest risk exposure. Our current recommendations are to go for a steeper real rate curve, a flatter BEI curve, ASW box (buy SGB1049 ASW versus SGB1057 ASW), a more convex government curve and buy SGB10419 in an ASW spread.
Trades
New
, buy SGBi3105, pay a matching swap and sell SGBi318 against SGB1054 in a BEI box at -28.5bp. This is an adjustment of our previous BEI box between SGBi3107/SGBi3108. We still believe short-end BEI spreads trade very low. Even though there is scope for longer dated BEI spreads to increase as well, we argue that it should be driven primarily by higher inflation expectations in the near term. P/L: - 45bp/-18bp.
Profit taken, buy SGBi3107 sell SGB1051, the BEI spread has reached our first profit target of 155bp. Even though we think there should be more long-term potential, we have decided to close the position and hope for a good entry level to take the position again. Profit +34.8bp including negative carry.
Profit taken, sell (receive) FRAJUN14 against buying (paying) FRAJUN15, The FRA curve has steepened significantly and is pricing a more reasonable repo rate path. In the longer term, more rate hikes could be discounted. However, in the near term, the position remains clearly directional. We choose to close the position with a 22bp profit.
Profit taken, buy SGBi3107, sell SGBi3108 and do the opposite in nominal bonds for a flatter BEI curve. We prefer to close this position and open a similar one where we instead buy SGBi3105 against a matching swap. At current levels, we slightly prefer holding the shorter linkers loan. Profit +13bp including negative carry.
New levels, buy SGBi3105 versus SGBi3108 in a real rate curve steepener. We have reached our previous profit target of 100bp. As we think the shortest index-linked loans continue to trade cheap and long-dated real rates are likely to continue to normalise, we choose to keep the position. We set the new P/L levels at 120bp/100bp and lock in a profit of 22.5bp.
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