Subje Jeffrey - 4 trades I like - Nay [C]
ct:
classification: confidential
Hi Jeffrey,
There hasn't been much I've really liked recently.
Here are four trades - 3 I like right now and 1 for now or soon.
1) BUY l0y BTPs @ 3.16% - This is a 3-6mth 'buy the rumour sell the
fact' tactical trade to position for ECB QE (now)
The ECB is preparing both itself and markets for QE - Its senior board
members have stepped up public comments over the past 48hrs. This is the
clearest sign so far QE could happen and why I am writing to you now.
Ideally ECB wants to buy ABS from small to medium sized European
companies but the outstanding available is relatively small so it will
likely buy Eurozone Government Bonds. The spread between Italian BTPs
and German Bunds has tightened significantly past 18months but old
metrics of value make no sense in Europe because they rely on history
when there was no QE.
While It's hard to get excited about l0y BTPs yielding 3.16% (164bp over
10Y German Bunds) I'd still have 5-10mm l0y BTPs in my portfolio both
for the duration and spread compression potential. I prefer l0y over Sy
because the recent nearly parallel spread compression has left 5sl0s
steep relative to 0-5s..
3 reasons i like this trade:
i) macro investors view ECB QE as a second bite at the cherry. Everyone
I talk to wants European risk assets having seen QE in the US.
ii) ECB QE is probably still 3-6mths away which will keep credit bid.
This will be a buy the rumour sell the fact trade
iii) credit has been bulletproof during the recent risk selloff because
a) ECB QE expectations, b) G3 rate hikes are being pushed into the
future while cash has nowhere else to go. This price action is telling -
as and when equities recover i think credit continues to tighten
Yields of 10Y Italy, l0y Germany and the Yield Spread
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2) Tactically position for higher EURUSD - 2 week view (now)
BUY EUR50mm 2week expiry 1.40 strike European Style EURUSD Calls 0 6bp
(EUR30,000)
This is a low cost contrarian short term tactical call. Most investors
myself included are bullish USD in the medium term (see trade 3)
but in the very short term I see EURUSD higher because:
i) Despite ECB preparing the markets for QE, the price action of EURUSD
(broadly unchanged) has been quite bullish compared to what one would
expect
ii) Speculators don't appear long EURUSD to us. Majority are short or
flat.
iii) implied volatility is 5.25% (offer for 2week options) which is very
very low historically. So this is a penny option, highly convex, pain
trade bet against other speculators betting on QE
If my view is wrong 6bp is lost. If I'm right I'd plan to exit in a week
making 4-6x
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