Horse Latitudes
Thematic Strategy and Market Analysis
— Low Rates and Safe Havens Redux Mike Schumacher
— Banks and Credit Intermediation Chris Ahrens
— Iboxx Index Extensions Pooja Kumra
Trade Recommendations
􀂄 US Rates Derivatives: 2yr Forward 3y2y Receiver
We recommend cheap 2yr forward starting vega through a combination of
receivers. The trade allows investors to capture otherwise outright expensive
5y2y carry. The structure capitalizes on the large gap in implied vols for up to
2yr expiries on 2y, 3y, and 5y tails. In addition, the vol profile of the trade
should benefit from Fed policy surprises, and should be profitable over wide
range of rates. The entry is at 63bp of the resulting 3y2y notional, with a target
of 83bp, and a stop of 43bp. Boris Rjavinski, Matt Rusinski
􀂄 Eur Rates Derivatives: 2y Forward Starting EUR 2s10s Steepener
We expect the positive mood in Europe to continue in the near term, and
favour tactical forward-starting steepeners, particularly 2s10s. To be clear, we
maintain our core strategic view that the crisis will escalate in 3-6 months. We
expect newly abundant excess liquidity following the 3-year LTROs to anchor
the front end. By contrast, the more positive market sentiment of the past
fortnight saw the 10 year rate selling off by as much as 20bps, leading to
bearish steepening of 2s10s - though some retracement has been seen midweek.
We enter this trade at a level of 112bp with a target of 126bp and a stop
of 105bp.