ITC Fixed Income Morning Recap: Bullish flattening in
30/07/2010 10:58:16
ITC Fixed Income Morning Recap:
- USTs in Tokyo/London: It's all been about month-end flows, JPY fund related buying and RM putting on flatteners (in 10s30s too)- with Monday's (and Aug's) supportive upcoming cash-flows, they expect the UST curve to flatten. FLOWS: Japanese RM buying of 5s and 7s, Central Bank buying of Bills and 3yr. More talk of stop outs on 5s30s in Tokyo
- Barcap US Month-End Index Extensions: US +0.06, MBS +0.08, Agncy +0.08, Agg +0.07
FX in London: Japan FSA will introduce tougher regulations, starting from 1 August 2010, which are designed to: 1) provide better protection for consumers; 2) better risk management, at the margin, at FX trading firms; and 3) discourage speculative trading by retail investors. The most important regulation, which may affect the JPY exchange rate, may be the stricter regulation on leverage. Starting from 1 August 2010, the maximum leverage will be 50x the committed cash; under the current regulations, there are no limitations on leverage. The maximum leverage will be lowered to 25x as of 1 August 2011. Lower leverage may lead to a reduction in the existing positions by those who will be affected. Looking at the current open interest at the Tokyo Financial Exchange (TFX) as of 29 July, margin traders have large long positions in foreign currencies, particularly in the AUD and USD, suggesting the buyback of JPY versus AUD, USD and other currencies
- European Fixed Income: Bull flattening on the large month-end Index Extensions. Also underpinning the mkt- large coups/redemptions (Spain today with Eur 23bn c/r's and Eur 28.5bn from Italy on Monday). We're been listening out for further CVA (Counterparty Valuation Adjustment) flows
today- this week the Eur 10s30s curve has steepened sharply on these hedging flows. However, flows have been quiet so far and traders suspect we'll see some REC flows today in the long end for the index rebalancing, which may halt the steepening move in the back end for now. Down the curve- front contracts spiked on the lower 3 mos Euribor Fix (0.896 vs 0.899- first print lower in 45 days). Dec Euribor resistance is pegged at 99.02 next.
We're over the 98.98 level which paves the way now for 99.02/035- 61.8% Fib June/July and late June highs.
- European Linkers: In euro inflation markets, month-end demand on the back of the duration extension of 1y+ indices may continue to support the market today. The Euro Govt Linker Index extends by 0.47 years, mainly due to the
OATi11 index drop.
- Gilts: outperform today- Gilts were looking very cheap vs US this week.
Sizeable Rebalancing today (alot of it prob done). Recall, the UK iBoxx one-year and over index should see a sizeable +0.17yrs rebasing as UKT9 7/11 rolls out and UKT4.25 12/40 enters the index. Barcap Sterling Gilts extension at 0.10 years, U.K. Gilt Linker Index extension at 0.36 years.
- Barcap European Month-End Index Extensions: Europe +0.13 years, UK +0.08 years.
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