| 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 consistent
with a cumulative 4.5 notches rating downgrade – from a
peak ofsix 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
investors 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 move 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 corrected 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 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 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/semi-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 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 Olos
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
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+ versus 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 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
GermanyNetherlandsAustriaFinlandFranceBelgiumIrelandSloveniaSpainItalyPortugal
5y-9.8-3.97.36.95.90.93.7-21.0-4.460.0-45.5
10y-18.8-1.49.25.38.614.7-7.0-25.1-1.958.2-41.9
15y-27.52.315.05.37.817.2-10.4-25.20.151.5-36.0
30y-13.3-14.820.2-4.016.422.6-23.3-22.08.719.5-10.0
5y0.2-0.20.80.2-0.40.11.0-0.20.80.3-0.6
10y-0.10.50.40.5-0.40.4-0.2-0.71.00.8-1.0
15y-1.21.20.70.4-0.51.3-0.7-0.30.20.9-1.1
30y-0.7-0.72.00.9-0.41.6-1.8-0.30.30.7-0.7
5y-2.6-3.91.70.11.44.58.2-4.97.0-16.24.7
10y-4.7-0.7-0.6-0.44.36.72.8-6.45.8-1.3-5.5
15y-7.71.60.80.42.97.7-0.9-0.70.52.7-6.7
30y-3.8-2.26.72.7-5.06.9-6.9-2.62.111.0-8.9
current gap vs spline (bp)
Z-score vs 12m av gap to spline
current gap vs 12m av gap to spline
| FOCUS 23/01/2019 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 spline curve: 5y cheaper than 3y nowFig. 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 protests to have limited impact on
rating trajectory; agencies to remain on hold for now.
Fitch affirmed France’s 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
expected 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, Moody’s
noted that it was unlikely to consider the possibility of a
rating upgrade until the end of 2019 or early 2020 whilst
the outlook would likely be returned to stable if the
government's reform momentum were to falter or if
implementation fell quite short of its plans. We expect
Moody’s to remain on hold on 3 May.
Italy: DBRS affirmed Italy on 11 January and we
expect the other agencies to follow suit in H1 2019.
According to DBRS, the 11 January confirmation of the
stable trend reflected the combination of (1) the
government’s 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 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 amore moderate agenda.
We expect Fitch (22 February) and S&P (26 April), both
of which hold a negative outlook, and Moody’s (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 Spain’s rating on
11 January, mentioning a high 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 very large; weak fiscal adjustment – among the
highest of Fitch-rated countries’ external leverage; political
risk and uncertainty around resolution of the Catalonian
regional government’s policy of pursuing independence;
and a still high unemployment rate.
While the economy remains resilient, structural reforms
are lacking and the country faces the possibility of new
elections. Hence we expect S&P (22 March), DBRS (22
March) and Moody’s (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, Italy and Spain
G10 INTEREST RATES
Fig. 10: Credit rating snapshot
Sources: BNP Paribas, S&P, Moody’s, 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 Stengeryte, G10 Rates Strategist, Europe | BNP Paribas London Branch
Fig. 11: H1 rating reviews schedule for France, Italy and Spain
Sources: BNP Paribas, S&P, Moody’s, Fitch.
Jan Feb March Apr May Jun
FRA 18th (Fitch) 5th (S&P) 26th (DBRS) 3rd (Moody's) 14th (Fitch)
ITA 11th (DBRS) 22nd (Fitch) 15th (Moody’s) 26th (S&P)
SPA 11th (Fitch) 22nd (DBRS) 22nd (S&P) 24th (Moody’s) 21st (Fitch)
RatingOutlookNext ReviewLastRatingOutlookNext ReviewLastRatingOutlookNext ReviewLastRatingOutlookNext ReviewLast
GermanyAAAStable12-Apr0.00AaaStable25-Jan0.00AAAStable25-Jan0.00AAAStable07-Jun0.00
FinlandAA+Stable15-Mar0.00Aa1Stable01-Feb0.00AA+Positive01-Feb0.25AA-HStable17-May0.00
NetherlandsAAAStable17-May0.00AaaStable22-Feb0.00AAAStable26-Apr0.00AAAStable25-Jan0.00
AustriaAA+Stable15-Mar0.00Aa1Stable22-Mar0.00AA+Positive31-May0.00AAAStable15-Feb0.00
FranceAAStable05-Apr0.00Aa2Positive03-May0.00AAStable14-Jun0.00AAAStable26-Apr0.00
BelgiumAAStable22-Mar0.00Aa3Stable19-Apr0.00AA-Stable05-Apr0.00AA-HStable15-Feb0.00
ItalyBBBNegative26-Apr-0.25Baa3Stable15-Mar-1.00BBBNegative22-Feb-0.25BBB-HStable12-Jul0.00
IrelandA+Stable31-May0.00A2Stable08-Feb0.00A+Stable17-May0.00A-HStable01-Feb0.00
SpainA-Positive22-Mar0.00Baa1Stable24-May0.00A-Stable21-Jun0.00AStable22-Mar0.00
PortugalBBB-Positive15-Mar0.25Baa3Stable15-Feb1.00BBBStable24-May0.00BBBStable05-Apr0.00
GreeceB+Positive26-Apr0.00B3Positive01-Mar0.00BB-Stable08-Feb2.00B-HPositive03-May0.00
FitchMoody'sS&PDBRS。