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Enron Mail |
COMMENTS
EUR SWAPS Flow of the day was large and consistent paying of 2s and 3s as they were paid in blocks of 250-500mm throughout the course of the session. This had the effect of flattening 2/10s by an impressive 8bps and of widening swap spreads by about 0.75bps in that part of the curve while spreads elsewhere closed the day pretty much unchanged. Further out the curve, we saw strong interest in the 5/10 spread though it's unclear if this was new risk or profit taking from the dealer community. With regard to spreads, I'm wondering if it makes sense to put on a swap spread widener here with a very short term view. Swap spreads blew out in the US yday as the market got the sense that most of the new issuance was out of the way and given how well EUR spreads held in despite yday's Singtel, ATT, and EIB pricing, perhaps EUR spreads are due for a small correction. Still like the narrower longer term, just thinking on a very short term basis. WHY THE FED WILL BE SLOW TO TIGHTEN In our view the econ recovery is not likely to be very powerful. There are large imbalances in the household and corporate sectors and the sources of stimulus (mortgage financing, etc) are likely to be much less than previously expected. Additionally, while it is true the nominal rates have fallen sharply, the decline in real rates is roughly half of the decline in nominals. On the inflation front, we believe inflation is likely to decline further as a consequence of both excess capacity and higher unemployment. With most major indices at 2.5% or lower, the Fed can be much more patient than normal when they consider whether or not they need to take back some of the 450bps of easing. Overall, we believe the Fed will want the econ to grow at an above trend rate in order to psh it back to full employment but against this we have a market that is now incorporating a signif amount of tightening over the next near (Dec Euro$ up 90bps in the last week). Even building in a risk premium of 10bps per contract, a 25bp sprd between 3m libor and fed funds, and 15bps of year end pressure, this still implies about 100bps of tightening by 2003. While not impossible, it neither reflects the Fed's thinking nor appears anywhere close to the center of our probability distrubtion. USD SWAPS/VOL Another 3 standard deviation event yday, with the sell-off in treasuries snowballing as negatively convex portfolios capitulated into selling by paying fixed at higher rates. The cork was finally removed from the pressurized bottle in spreads - with most corporate deals out of the way - and took their natural course by widening by 5bps. We saw heavy flows, with paying across all sectors, save the very long end. Vols were up on the day. Gamma shot up 0.5bps/day, which is a pretty large move; longer expiries were up about 0.2bps/day, which is in line with the market price of skew. Flows were not as heavy as one might have expected; at least for the time being. The market is clearly saying that this is the turn in the economy, and that we're already heading for a sharp recovery, with aggressive Fed tightening action over 2002. This seems to be somewhat premature. With no inflation in sight, and still big signs of weakness in the economy, it is unlikely that the Fed will reverse its course this fast. Whilst this sell-off might not be over in the near term, (expect high volatility), we remain constructive on the outlook for rates in the medium term. IPOs & CORPORATE ISSUANCE Both the coporate bond market and the equity IPO market seem to be recovering a bit here. The avg spread tightening on the 3 Sing Tel and 4-fixed rate ATT tranches is 19bps between where the deal was priced yday and where it opened this morning. On the equity side, not only are our sec lending people telling us that short interest is decreasing (ie more pple covering shorts), but IPO calendar is also firming up. The US market had its busiest week of the year with 5 IPOS & 15 secondary offerings and can look forward to the $3bln Prudential next month while Europe pitched in with a $3bln convert deal for Swiss Re and expects some $9bln in new issuance by the end of the year. While it's unclear how much underwater portfolios will look to take on new posns going into year end and while this flood of issuance may simply be due issuers looking to tie up loose ends before year end, it does appear the global investor base is becoming a bit more receptive to new deals. LEVELS (close to close, ex basis) SWAP CURVE GBP/EUR(EUR convention) today t-1 5y5y -25 -25 15y15y -144 -142 10/30? -39.0 -37.5 10/30E +44.8 +46.0 EUR SWAP SPREADS 5y: Bobl 138 26.7 unch 10y: Jan 11 bund 33.8 unch 30y: Jan 31 bund 21.6 0.2 wider GBP SWAP SPREADS 5y: 8h Dec 05 52.0 2.0 narrower 10y: 9 Sep 11 48.0 2.0 narrower 30y: 6 Dec 28 35.0 unch EUR SWAP VOLATILITY 3m into 10yr 13.9 unch 1y into 10yr 12.6 0.3 lower 2y into 10y 12.3 0.2 lower 5y into 5y 12.1 unch 5y into 25y 10.1 0.2 lower 10y into 20y 9.4 0.2 lower 5y5y swaption/5x10 cap spread 2.3 SCHATZ BASIS TO DEC Bko 3.75% Sep 03 12.0 gross bid,1.40% repo offer,0.0 net Dbr 6% Sep 03 20.0 gross bid,1.85% repo offer,-0.9 net Tha 6% Nov 03 37.0 gross bid,3.15% repo offer,23.2 net BOBL BASIS TO DEC Obl 138 7.8 gross bid, 2.50% repo offer, -1.7 net Jan 07 39.0 gross bid, 3.15% repo offer, 26.7 net BUND BASIS TO DEC 5.25% July 10 11.5 gross bid,2.20% repo offer,-3.4 net 5.25% Jan 11 57.0 gross bid,3.20% repo offer,48.4 net This material is for your private information, and we are not soliciting any action based upon it. 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