Global Fixed Income Markets Weekly

Press Release – JP Morgan

GGBs will become ineligible for funding at the ECB if Moody’s downgrades Greece by more than one notch and the ECB tightens its collateral criteria to pre-crisis levels at year-end.Global Fixed Income Markets Weekly

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Overview Pavan Wadhwa, Christian O’Donnell
GGBs will become ineligible for funding at the ECB if Moody’s downgrades Greece by more than one notch and the ECB tightens its collateral criteria to pre-crisis levels at year-end. We do not expect GGBs to become ineligible given that 1) Greece is expected to deliver on its fiscal plan, 2) Moody’s is unlikely to downgrade them by more than 1 notch given their sanguine commentary, and 3) even if Moody’s rating falls below the relevant threshold, we expect a relaxation of collateral rules and/or an EU/IMF support package for Greece.

Euro Pavan Wadhwa, Fabio Bassi, Gianluca Salford
Turn neutral on duration but stay with 2s/10s flatteners. Focus on intra-EMU spread RV; overweight 5Y Portugal, and 10Y and 15Y Ireland. Enter longs in Austria vs. Belgium, and shorts in 5Y Finland and 8Y France vs. Germany. Enter Jul10/Jan11 EONIA steepeners and stay long Jul10 EONIA. Initiate 2s/10s bull flatteners with 1M receivers. Unwind 30Y swap spread wideners and take profit in 2s/10s swap spread curve steepeners. In vol, enter short gamma on 3Mx2Y via OTM delta hedged receivers. Hold long 6Mx5Y vs. 6Mx30Y straddles.

UK Francis Diamond
Stick to shorts in 10Y, targeting 4.40% in the next couple of months. Hold 5s/10s steepeners. 30Y part of the curve looks cheap into the Sep39 auction; buy the belly of the 10s/30s/50s.

US Terry Belton, Srini Ramaswamy
Turn bearish on duration and stay neutral on the curve. Keep wideners in the 6-7Y part of the curve given our expectation of higher mortgage rates. We are biased towards bearish vol positions expressed via shorts in 6Mx(2s/10s) curve straddles.

Japan Makoto Kuroda
Turn tactically neutral on duration, but maintain a bearish bias in the intermediate run. Look to enter fiscal year-end JGB curve trades such as 7s/10s or 5s/10s flatteners.

Inflation Jorge Garayo, Meera Chandan, Francis Diamond
Position for wider TIPS breakevens in the US. Keep long breakevens in UK ILG 13 given valuations and risks of a VAT hike post general election. In Euro area, continue to receive 10Y HICP (pay fixed) vs. 5Y and 30s, 15Y HICP is cheap vs. 15Yx15Y, stay short breakevens in DBRi 20 vs. 10Y HICP.

Australia Sally Auld
Look to pay 1Yx1Y at 5.35% or lower, and receive at 6.20% or higher. Favour received positions 3s/10s swap /efp box. For 3s/10s, we target a move to +75bp or better to enter flatteners. Stay long 10Y AUD-GBP trades.

ends

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