FIXED INCOME ● RATES
29 June 2018Buy 5Y Greece 3
Dawn of a new era 3
US 2s3s has flattened enough 5
2s3s is flat enough 5
UK breakeven steepeners 7
Increasing our breakeven
steepening exposure 7
AUD funding focus 10
Tactical steepeners are back in
fashion 10
Buy USD KFW bonds vs OIS 12
Nearing inflection point 12
Covered Bonds 14
Long-dated German Pfandbriefe
into French covered bonds 14
Supply outlook 16
Volatility corner 20
Credit ratings 23
Trade tracker 24
Disclosure appendix 28
Disclaimer 32
ContentsFIXED INCOME ● RATES
29 June 2018
Table 2. Buy GGB 3.5 1/23
Trade Time horizon Entry (date) Target Stop 3m C+R Rationale Risks
Buy GGB 3.5 1/23 6-12 mnths 3.25%
28 Jun 18
2.25% 3.80% +30bp curve normalisation,
credit upgrades
issuance; poor
growth; politics
Source: HSBC
Dawn of a new era
We think the five-year benchmark still represents value as Greece nears the end of the bailout
era (see our economics report Now it’s down to Greece, 27 June 2018). The debt relief deal
effectively term-subordinated the public sector: uncertainty and funding needs in the next five
years are low, making sub-10-year bonds attractive. Greece still trades at a substantial premium
to other eurozone sovereigns relative to its credit rating (Figure 1): the 2019 bond has
normalised, but this leaves the five-year looking cheap (Figure 2).
Further credit upgrades are also possible, following S&P’s move to B+ from B on 25 June.
Greece looks attractive compared to EM sovereign spreads, especially considering the pressure
of external factors for EM rates (see EM Action, 25 June). GGB spreads have a relatively low
correlation to both Italy and EM, particularly considering its wide spread: as it is mostly an
idiosyncratic story, the trade is not predicated on global conditions improving. The large positive
carry also makes this position attractive, even if the curve is slow to normalise.
Buy 5Y Greece
Debt relief effectively term-subordinates the public sector and
improves the short-end credit outlook: rating upgrades could follow
Light redemptions and cash buffers support Greece’s normalisation
The 2023 five-year benchmark trades flat to the 10-year in asset-
swap terms: we look for it to tighten, as the 2019 already has
Chris Attfield
Strategist
HSBC Bank plc
christopher.attfield@hsbcib
+44 20 7991 2133
Figure 1. Quadratic fit to eurozone spreadFigure 2. ASW curve could continue bull steepening
Source:Bloomberg, HSBC calculations. IT, GR excluded from fitSource: Bloomberg, HSBC calculations (NB PSI bonds at the long end prior to the present curve)
Greece’s spread curve still
has some way to go before it
looks normal
AT
BEFI
FR
DE
IENL
PT
ES
GR
IT
AAAAAABBBBBB
y = 0.71x2+ 2.75x -52.84
R = 0.96
-100
-5050
100
150
200
250
300
5Y
sw
ap
sp
rea
d (
bp
)100
200
300
400
500
600
700
05101520
I-s
pre
ad
(b
p)
maturity (y)
present
Sep-17
May-17
FIXED INCOME ● RATES
29 June 2018Normalisation theme continues
Last year we highlighted that the asset swap curve was inverted, and recommended buying the
2019 bond (see European Rates, 22 May 2017, page 15). The opportunity of curve
normalisation has been a theme for us since last year when Greece re-established market
access (The return of Greece, 27 July 2017). Now that the 2019 GGB is trading flat with bills,
we look for the flattening to extend to the five-year point.
Relative value
Compared to EM sovereigns, Greece still looks competitive in spread terms following May’s sell-
off. Figure 3 shows that Greece 5Y ASW was equal to an EM diversified spread index earlier in
June. The difference is that Greece is a story of a return to normality and strengthening credit
metrics, in contrast to the trade war and investment flow concerns of EM. Greece still trades
cheap to the iBoxx EUR HY credit index, which is of similar duration.
Funding needs
Greece has cash reserves for 22 months, and the debt relief agreement extended the interest
and principal payments on the EFSF debt to beyond 2032. With the exception of 2019, its
redemption calendar is light for the next five years (Figure 4) – and our economists’ forecasts of
modest budget surpluses through 2019 imply deficit financing will not be necessary. The post-
programme period should also see Greece receive the profits on Eurosystem GGB holdings.
Risks to the trade
We have previously divided the risks of Greek debt into liquidity, credit and policy risk. Of these,
the latter has receded with the debt relief agreement, although this was largely priced in judging
by the market reaction. Any early election could lead to some volatility, but we see New
Democracy as a market-friendly opposition. Credit risk in the short term looks to be contained
(see above): in the longer term low growth is a risk to debt sustainability, but focusing on the
short end minimises this concern. Liquidity risk is a major consideration: markets are still shallow
and bid-ask spreads wide. We would favour buying a three-year bond if it were syndicated, but
any issuance of a new benchmark could result in selling existing issues. In addition EM or
eurozone volatility could still make its presence felt.
Credit rating prospects
The CDS market already prices Greece as B+, although that comes with a large error bar
Moody’s and Fitch still have Greece on Positive outlook, with Moody’s describing the debt relief
deal as a “significant benchmark in Greece’s ongoing recovery” (Bloomberg, 26 June).S&P
have already upgraded Greece one notch; other review dates are Fitch on 10 August and
Moody’s on 21 September.
Now that the 2019 bond is
trading flat with bills, we
extend to the five-year point
Greece spreads still look
competitive compared to EM
sovereigns
With the exception of 2019,
the redemption calendar is
light for the next five years
Figure 3. Still EM spread levels – but a different storyFigure 4. Redemption calendar is light over next 5Y
Source: Bloomberg, HSBCSource: Bloomberg
Liquidity risk is a major
consideration
Moody’s called debt relief a
“significant benchmark in
Greece’s ongoing recovery”
304
361
200
220
240
260
280
300
320
340
360
380
400
Dec 17Mar 18Jun 18
Sp
rea
d (
bp
)
Greece 5Y ASW
EM diversified
spread index2,000
4,000
6,000
8,000
10,000
12,000
14,000
20182019202020212022
red
em
pti
on
s (E
UR
mn
)
Bond
Principal
Term
Loans
Interest。。。。。。。。。