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11 May 2012 Fixed Income Research

European Strategy and Trades

Interest Rate Strategy
Research Analysts Michelle Bradley +44 20 7888 5468 Panos Giannopoulos +44 20 7883 6947 Helen Haworth +44 20 7888 0757 Thushka Maharaj +44 20 7883 0211 Marion Pelata +44 20 7883 1333 David Sneddon +44 20 7888 7173 Florian Weber +44 20 7888 3779 Sabine Winkler +44 20 7883 9398

Election fallout
The election results in Europe were broadly as expected. The inability to form a government in Greece has, however, raised the issue of euro breakup again. This is not our base case scenario and certainly not over the next couple of months, and indeed the news that the EFSF will fund Greece until June resulted in a collective sign of relief and talk again of risk on. We think the core issues remain the same lack of growth and a weak banking system, as highlighted by the Spanish governments nationalization of Bankia. And so the volatility will likely continue With the next round of summits approaching, we discuss the role of the EIB. Technically increasing the lending capability of the EIB is relatively straight forward, but the question is whether this is at the cost of a weaker EIB balance sheet this is risk for EIB spreads. European Governments: Volatility continues in European governments with the post election sell-off followed by a recovery rally. We suggest taking profits on long 5Y Belgium versus Austria. We believe the belly of the 5s10s30s fly in France is cheap versus the wings. We recommend receiving it at 47 bp. UK Strategy: The pause in the QE program is expected to support our pay recommendation in GBP 5s10s30s. We also recommend selling 10y ASW spreads to take advantage of this decision and upcoming 10y supply. The next main focus for the UK market will be the May Inflation Report. Although we expect an upward revision to inflation, we view current market pricing for a hawkish report as overdone. We maintain our receive GBP 2s3s5s fly recommendation. Derivatives Strategy: We recommend receiving CHF 5s10s20s. We recommend a L Z2/Z3 conditional bull steepener expressing the view that the FRA-Sonia term structure ought to be upward sloping conditional on low spot fixings and that some residual hike premium ought to be priced in Z3. Money Market Strategy: Looking at Thursdays big sell-off on the short-sterling strip, following the MPC minutes, we think markets are pricing too much of a risk premium on further-dated tenors and recommend going long the Jun-14 contract. Covered Bonds: The notice of the suspension from exchange-based trading caused the asset swap spreads (ASWs) of CIFEURs covered bonds to widen nearly 45bp. On 10 May 2012, the ASWs of CIFEURs outstanding EURbenchmark covered bonds were trading at m/s +120bp. Although the ASWs of CIFEURs covered bonds have widened significantly, those of other French covered bonds have not. However, stress related to CIFEUR may spill over to other French lenders with a similar business model and credit profile. Technicals: Risk Off



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11 May 2012

Table of Contents
Summary of views New trade recommendations Trade Performance Events Calendar Election fallout 3 4 5 6 7

EIB can support growth but at what cost? .................................................. 8 European Governments 13

Trade Idea: Receive FRTR 5s10s30s fly ..................................................... 13 UK Strategy 16

BoE signals pause in QE ............................................................................. 16 Derivatives Strategy 20

Receive CHF 5s10s20s ............................................................................... 20 L Z2/Z3 conditional bull steepener ............................................................... 20 Money Market Strategy 22

Going long Short-sterling ............................................................................. 22 Covered Bonds 23

CIFEUR: suspended from exchange-based trading .................................... 23 Technicals A momentum sell for Global Risk Appetite should see risk off extend further ............................................................................................... 25 EUR and UK Supply Analysis Forecasts 27 32 25

European Strategy and Trades

11 May 2012

Summary of views
Exhibit 1: Summary of core views
Currency Market Outright View Moderately bearish Bunds. Expression Favored shorts are 5y and 10y Germany, 30y swap, or long-dated forwards, such as 20y20y (pay 20y20y outright). Pay EUR 2s10s 10y fwd. Pay 10s30s 2y fwd. Receive a 5s10s30s proxy fly (such as 2s7s20s 2y fwd). Curvature Long-end normalization should cause 5s10s30s to grind lower. Receive EUR 10s15s30s. Pay 2s5s10s hybrid fly (5y Germany vs. 2y and 10y Eonia). Receive 5s10s30s in France. EUR Gamma on tails cheap, outright and vs. GBP. Options can be used as a vehicle to express directional views. Buy cheap payer flies to position for a sell-off in rates in a limited way. Core ASW Bobl and Bund ASW are rich. Negative Netherlands. Move positive on Belgium and France short end. Cautious trade the range. Move to neutral. Pause in QE. 10-year sector rich on the curve. Steepeners in SEK offer good risk/reward. USD to resume its sell-off relative to EUR and lead in a bearish environment. GBP 10s30s is too steep relative to USD and EUR. Risk reversal (buy payer, sell receiver) or payer fly in 30y tails. Buy Bund straddles or 3m10y outright. Buy 1m10y vs. GBP. Express as boxes versus 2y or 30y ASW. 5s10s Nether vs. DBR (long 5y Nether). Buy 2y France vs. Germany. Buy 2y Belgium vs. Germany. 2.5y-3y sector is rich in Spain, 2s10s flattener in Italy. Pay 5s10s30s. Receive 5y5y/10y5y. Receive 2s3s5s fly. Pay SEK 2s10s 1y fwd. Receive CHF 5s10s20s Buy USD payers vs. EUR. Receive GBP 2y2y vs. USD. GBP/EUR 10s30s box.


Long end to continue to grind steeper.


Core Spreads





Source: Credit Suisse

European Strategy and Trades

11 May 2012

New trade recommendations

New trades we recommend this week
Receive FRTR 5s10s30s Receive CHF 5s10s20s Sell UKT 10y ASW spreads L Z2/Z3 conditional bull steepener Buy L M4

Positions we recommend closing this week

Buy 5Y Belgium versus Austria Buy EUR 1m10y straddle versus GBP 1m10y strangle

European Strategy and Trades

11 May 2012

Trade Performance
Exhibit 2: Current trade recommendations
Category Idea Name European Governments 2s10s Flattener in Italy 3s5s Flattener in Spain Shorten DBR 42s into 34s France-Netherlands 5s10s box (OAT flattener) and alternative expressions of the view Netherlands 30s into 5s cash for cash spread Sell SPGB Oct14 versus Oct13 and Jan17 Buy SPGB Jan17 versus Oct14 and Apr20 Sell 10y France vs 10y Germany Buy 2 protection in Ireland (reduced size) Buy 5Y Belgium versus 5Y Austria Buy BTP Mar 15 vs Feb 15 Buy Obl 162 vs Obl 159 5s10s Netherlands-Germany box (Netherlands steepener vs Germany flattener) Sell DBR 3.25% Jul 21 into 5.5% Jan 31 Buy 2-year Belgium versus Germany Buy 2-year France versus Germany UK Sell UKT 4s 22/5s 25/4T 30s fly Buy UKT 52s vs 42s and 60s GBP Pay GBP 5s10s30s GBP 5y5y/10y5y flattener Receive GBP 2s3s5s fly GBP 20y5y-25y5y steepener EUR Pay EUR 10s30s 2y forward Pay EUR 2s10s 10y fwd Receive EUR 2s7s20s 2y fwd Receive EUR 2s7s20s 2y fwd conditionally via OTM payers Receive EUR 10s15s30s Sell Bobl spreads Pay EUR 20y20y CHF/SEK Pay SEK 2s10s 1y fwd Receive CHF 5s10s20s XCY Pay EUR 30y versus GBP Receive GBP 2s20s 5y fwd vs USD, hedged with 5s Receive GBP 2y2y vs USD Volatility Buy EUR 6m30y 2.8%/3.1%/3.4% payer fly Buy EUR OTM payers on 30y tails vs. OTM receivers 6m5y conditional USD-EUR widener via OTM payers Buy EUR 1m10y straddle vs GBP strangle Buy EUR gamma on 10y tails Sell GBP 6m2y payer vs receiver spread Money Markets Receive Oct-12 ECB dated 1m Eonia L-ER 5-7 box (buy L, sell ER) Buy 1y1y Euribor-Eonia
Please see the Structured Securities, Derivatives, and Options Disclaimer. Please note all trades are available and marked daily in Credit Suisse PLUS Analytics Source: Credit Suisse

Start Date 05-Jan-12 12-Jan-12 02-Mar-12 09-Mar-12 15-Mar-12 15-Mar-12 15-Mar-12 22-Mar-12 23-Mar-12 19-Apr-12 19-Apr-12 19-Apr-12 26-Apr-12 30-Apr-12 03-May-12 03-May-12 09-Feb-12 12-Apr-12 29-Mar-12 26-Apr-12 26-Apr-12 30-Apr-12 01-Dec-11 27-Jan-12 10-Feb-12 02-Mar-12 22-Mar-12 29-Mar-12 12-Apr-12 04-Apr-12 09-May-12 19-Apr-12 20-Apr-12 26-Apr-12 02-Feb-12 15-Mar-12 20-Apr-12 25-Apr-12 27-Apr-12 01-May-12 23-Feb-12 26-Apr-12 04-May-12

End Date





P&L (EUR) -2,019,953 -1,651,483 -1,174,982 95,286 -1,021,705 85,709 -228,260 742,827 -704,670 87,675 57,704 96,244 140,555 570,575 147,946 -41,295 -220,994 -98,203 -1,101,766 -841,332 -233,578 57,484 3,044,303 593,447 1,500,722 66,596 -64,456 -1,442,490 -1,288,824 -38,096 0 -131,561 -309,440 61,095 -179,401 -120,708 36,190 1,504,037 103,589 41,951 183,709 23,771 623,707

As Of 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 03-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 09-May-12 04-May-12 09-May-12 09-May-12

Exhibit 3: Current year-to-date PnL of portfolio (EUR)

YTD PnL WTD PnL 12m rolling weekly PnL average
Source: Credit Suisse

20,794,212 -1,332,427 1,741,675

European Strategy and Trades

11 May 2012

Events Calendar
Exhibit 4: Meetings, economic events, auctions and redemptions
Date Day Meetings / Events Ctry FR IT EA Economic Data Current Account (Mar) CPI (Apr F) Industrial Production (Mar) Auctions Ctry Type FI RFGB 2017 IT BTP 2015 IT BTP 2020 IT BTP 2022 IT BTP 2025 SK SLOVGB 16 SK SLOVGB 17 bn Ctry 1.0* 3.0* 0.5* 0.5* 0.5* 0.3* 0.3* IT Redemptions Type bn 14/05/2012 Mon

15/05/2012 Tue

16/05/2012 Wed

Minutes of FOMC Meeting Bank of England Inflation Report

17/05/2012 Thu


CPI & Retail Sales/Ex Auto (Apr) Empire Mfg & NAHB Housing Market (May) Business Inventories (Mar) CPI (Apr) & GDP (Q1 P) Non Farm Payrolls (Q1 P) GDP (Q1 P) & ZEW Survey (May) Housing Starts/Permits (Apr) Ind Production/Capacity utilization (Apr) GDP (Q1 P) & Trade Balance (Mar) CPI (Apr) & Trade Balance (Mar) Claimant Count Rate (Apr) Jobless Claims Change (Apr) Avg wkly Earning & ILO Unemp Rate (Mar) Initial Jobless Claims (May 12) Philadelphia Fed (May) & Leading Ind (Apr) GDP (Q1)




Bund 2022



BTF Bubill

5.69 4.0



2.5* 2.5* 2.5* 1.0* 0.8* 1.0* 1.5*




18/05/2012 Fri


PPI (Apr) Industrial Orders/Sales (Mar)

ES GR GR PT BE BE BE NL BGB 10Y* BGB 3Y* BGB 5Y* DSL 2015 0.3* 0.5* 0.4* 3.0*


7.45 3.33 1.6 1.4

21/05/2012 Mon

22/05/2012 Tue

23/05/2012 Wed

Bank of England Minutes

24/05/2012 Thu

25/05/2012 Fri


Construction Output 9mar) Current Account ( May) Rightmove House Prices (May) Richmond Fed Mfg (May) Existing Home Sales (Apr) Consumer Confidence (May) DCLG House Prices (Mar) CPI & RPI & PSNCR/PSNB (Apr) New Home Sales (Apr) Current Account (Mar) Consumer Confidence (May) Initial Jobless Claims (May 19) Durable Goods Orders (Arp) GDP (Q1) & Ifo Business Climate (May) Business Confidence Indicators (May) PMI Composite/Manufacturing/Serv (May) Ifo Business Climate (May) GDP (Q1) & Retail Sales (Apr) Total Business Investment (Q1) University of Michigan Confidence (May Fin) Gfk Consumer Confidence (Jun) Retail Sales (Mar) & Hourly Wages (Apr)


Schatz 2014





Source: Credit Suisse, National Treasuries, ECB, Bank of England, the BLOOMBERG PROFESSIONAL service

European Strategy and Trades

11 May 2012

Election fallout
Michelle Bradley +44 20 7888 5468

Politics continue to dominate the European rates market once again. The dynamics of this market continue to move at lightning speed. The post-election reaction seemed to be delayed following public holidays in the UK on Monday and some of Europe on Tuesday. However, Wednesdays sell-off was reversed on Thursday as the market discussed risk on again following the news that the EFSF will fund Greece until June, some stronger data from Europe, and the suggestion that the Bundesbank would adopt a more flexible approach to German inflation. The election results were as expected in both France and Greece. Hollande as president of France raises concern about the future of the fiscal compact but, we expect the preelection talk to be somewhat dampened by the chains of government. Greece is more concerning, bringing to the surface again the idea of euro break-up. Bunds rallied and spreads widened and the euro fell, but we cant help but think the reaction was a little muted and doesnt suggest to us the market really believes that a euro breakup will happen in the next few months. We expect elections in Greece to be the most likely outcome of the post-election discussions, and so we potentially get some breathing space until mid-June. As has happened throughout this crisis, the can has been kicked down the road yet again. In the meantime, the issues remain the same lack of growth and a weakening banking system. Last week we recommended a 1y1y Euribor-Eonia basis widener, as we thought the forward term structure of the basis curve was too flat. We saw this as cheap protection against any event risk arising from the upcoming Moodys downgrade or other concerns on Spain. In fact, this spread widened earlier than we thought due to the election vote in Greece. One of the main moves this week was the widening in the FRA/Eonia spreads across the term structure, which benefited our recommendation.

Exhibit 5: FRA/Eonia basis has started to widen in the recent risk-off move
39 37 35 33 31 29 28 27 25 27 29 30 30 37 37 36 34 34 33 31 32 31 32 31


10/05/12 28/03/12






In fact, the 1y1y Euribor-EONIA spread widened 5bp over the week as concerns on Greece increased. We recommend holding this position as cheap protection against further volatility out of Greece. The banking sector is never far from the headlines and the suspension of CIFEUR bonds on exchange-based trading is noteworthy, and we discuss this in the covered bond section. The notice of the suspension from exchange-based trading caused the asset swap spreads (ASWs) of CIFEURs covered bonds to widen by around 45bp. On 10 May 2012, the ASWs of CIFEURs outstanding EUR-benchmark covered bonds were trading at m/s +120bp. Although the ASWs of CIFEURs covered bonds have widened significantly, those of other French covered bonds have not. However, stress related to CIFEUR may spill over to other French lenders with a similar business model and credit profile. Indeed, this may be one of the first tasks facing the new French president and also points to risk for French government bond spreads.





European Strategy and Trades

11 May 2012

Spain is also back in the spotlight following the decision of the government to nationalize Bankia. As we discussed in the EST 20 April, we think Spains funding needs are manageable by the domestic banking system to the end of the year, but the impact of support for the banking sector on the already stressed fiscal targets are concerning It was also an eventful week in the UK. The BoE MPC meeting went as we expected the committee decided to pause the QE program. This led to a sell-off and flattening of the 5s30s and 10s30s curves, which benefited our recommendation to pay GBP 5s10s30s. Into next week, the main focus for the UK (other than Europe) will be the May Inflation Report. We expect the MPC to shift the growth projection lower while moving the inflation projection higher. We expect the MPC to guide policy expectations in the Inflation Report and it is possible that the MPC will keep the door open for more QE, if the situation in Europe deteriorates further. For now, we think its too early to be pricing for rate hikes in the UK and maintain our recommendation of receiving GBP 2s3s5s fly. Our core views remain the same moderately bearish and favouring steeper curves. On peripheral spreads, we remain cautious with a very tactical approach. This week we recommend receiving 5s10s30s in France. The next couple of weeks also mark the beginning of another round of European summits, starting with the Eurogroup on May 14. Typically these summits have failed to deliver the high pre-summit expectations, but this time around it seems as if the market is expecting less and this at least sets the scene for some positive summit surprises.

EIB can support growth but at what cost?

The use of the EIB has been advocated in various guises over the course of the crisis. The latest suggestion is that the EIB is involved in promoting growth in Europe through expansion of its lending capabilities. We discuss the EIBs current strategy and its ability to increase lending. An increase in lending is likely to be perceived as positive for stimulating growth in Europe. From the EIB perspective, there are two risks first a significant increase in issuance and with that a loosening of credit quality of the balance sheet. EIBs lending policy is based around four principles: Increase growth and employment potential; Economic and social cohesion; Environmental sustainability; and Projects that specifically contribute to climate action. Given these principles, its clear why the EIB may be used as a partner to promote growth in Europe. The ECB facilitates this role by lending to large infrastructure projects but also lends to Europes SMEs around 18% of its loan books is to SMEs. EIB lending can be divided into two broad categories projects in excess of 25 million and projects below 25 million, where the EIB does not lend directly but via an intermediary bank, which also provide half of the funding. Part of the EIB statue states that funding should be granted only on the condition that other sources of financing are available. The EIB aims to fund a maximum of 50% of a project. The EIB provided 62 billion of financing in 2011. According to the EIB 2012 to 2014 Lending Programme, the EIB are planning to reduce this to 50 billion in 2012, 48 billion in 2013, and 46 billion in 2014, see Exhibit 6. Looking forward, the EIB states the aim of its lending programme is to maximize its lending programme within the constraints of its risk bearing capacity.

European Strategy and Trades

11 May 2012

So its interesting to consider the recent discussions about the EIB increasing its lending programme when that was clearly not the plan of the EIB itself. That is not to say there cannot be a change in strategy; its clear that the EIB increased its total lending over the course of the crisis and this higher lending strategy could be prolonged. However, in order to maintain the higher levels of lending, the EIB would need to increase its capital base to ensure it keeps its triple A rating. The decision to increase the EIBs capital is made by the board of governors and needs a majority of members, where the majority must represent at least 50% of the subscribed capital. The board of governors consists of the ministers designated by the member states. Therefore, the mechanics of increasing the EIBs capital are relatively straightforward as long as a majority in Europe is in favour.

Exhibit 6: EIB annual lending programme

Exhibit 7: EIB capital weightings by country

Source: EIB

Source: EIB

The EIB is 100% owned and has explicit support from the 27 EU members. The EIBs capital of 232 billion is paid in by the 27 EU members based on their economic weight at the time of accession. Exhibit 7 shows the capital weighting per country. Of note is that 75% of the capital is provided by the first five countries. At the end of 2011, EIB had total assets of 472 billion, which gave it a capital ratio of 24.9%. This capital ratio is extremely high when compared to commercial banks but also indicates the lending restrictions that the EIB is faced with in order to preserve its triple A rating.

Lending versus capital

The EIB lends predominantly to projects within Europe around 90% of its funding is to projects in the EU. Given that lending is done predominantly in the euro area and the euro area governments are also providing the capital, it is interesting to look at the breakdown of the lending book compared to the breakdown of the capital. In the chart below, we have taken the percentage of lending per country and divided it by the percentage of capital that each country.

European Strategy and Trades

11 May 2012

Exhibit 8: Lending to capital ratios for the EIB

Source: Credit Suisse

This is a useful way to gauge the actual country exposure, in our view, and Portugal stands out as the country to which the EIB is most exposed. Over the past five years, the EIB has provided lending worth 8% of GDP to Portugal, 3% of GDP for Greece, and 2% of GDP for Ireland The exposure by country is also relevant to the extent that EIB partner with governments in a significant amount of its lending projects. Of its total lending book, 21% of the ultimate obligors are sovereigns, 24% public institutions, and 22% banks. The EIB also enjoys preferred creditor status and protection from expropriation. The benefit of the preferred creditor status was clear in regard to Greece. Like the ECB, the EIB did not suffer haircuts on its bonds. So although it has high exposure to sovereigns and the banking sector, there is also an additional element of protection through its preferred creditor status and exemption from all forms of requisition or expropriation as stated in the EIBs statue. Therefore the EIB has significant funding advantages over commercial banks in the area of project finance.

Demand versus supply

The current discussion in the market suggests increasing the capital of the EIB by around 10 billion with the aim of providing an additional 60 billion of lending capability. We think this would represent a change in professed strategy by the EIB. But a relevant question here is if additional lending is available, will there be demand? The recent lending surveys from the ECB shows that banks lending growth is still weak and actually fell in March. As ever with this data, the question is whether the fall was driven by lack of supply or lack of demand. Our economics team has pointed out the ECB bank lending survey does suggest the fall is driven by a lack of demand.

European Strategy and Trades


11 May 2012

Exhibit 9: Banks lending suggest lack of demand rather than supply

Source: European Central Bank, Credit Suisse

The EIB has the advantage of being able to fund at triple A spreads, and so on that basis, it should be able to offer more competitive funding than commercial banks. The fact that the EIB partners with other institutions is also be a positive. However, should a very high level of uncertainty continue especially on the future of the euro project this may not be the optimum time for expansion and development plans, so the supply side is the issue On the whole, from a growth perspective, an announcement to increase the lending capability of the ECB should be perceived as a positive by the market. However, its not clear to us that this plan will have an immediate impact on growth, and therefore the benefit of such an announcement could have limited impact unless it forms part of a great plan to expedite growth Europe.

The current expected issuance programme for the EIB in 2012 is 60 billion and compares to 75 billion issued in 2012. Over the last six years, issuance peaked in 2009 at 80 billion. This puts the 60 billion addition lending capacity into perspective. An additional 60 billion of issuance for EIB in one year would be significant and would put an immediate strain on spreads, in our view. However, should the 60 billion increase in lending be spread over a number of years and issuance spread over a similar time frame, we think this is more manageable by the market. Exhibit 10 shows the EIB composite spread calculated by weighting the assets swap spreads of the top five countries by their capital contribution. The EIBs preferred creditor status which was really highlighted with the Greek restructuring may be having an impact. However, given the talk about an increased mandate for the EIB and hence more issuance the spread differential is notable. We think its important that in further discussion about the EIB there is focus on the quality of the lending as well as the amounts. As we have seen with the EFSF, increasing the scope of an entity is not always positive and particularly when the increase results in a different risk profile.

European Strategy and Trades


11 May 2012

Exhibit 10: EIB 10Y vs. Composite ASW Spread

Composite France, Germany, UK, Italy, and Spain

Exhibit 11: Differential EIB 10Y vs. Composite ASW Spread

Composite France, Germany, UK, Italy, and Spain
70 60 50 40


30 20 10 0 -10 -20 Sep-11









Composite Spread vs EIB 10Y

Source: Credit Suisse Locus

Source: Credit Suisse

The risk for the EIB is that in order to promote growth the lending criteria and scope of the EIB is increased, which results a change in its current risk profile impaired loans of 0.1% of total loan book will be a much envied statistic across the bank board rooms of Europe. Currently the risks are finely balanced. Should the EIB continue on its current path, this would mean issuance would fall over the next few years, which should be positive for spreads. The flip side is that the EIBs lending capacity could be increased and if done over time should be relatively neutral. The risk is a change in mandate that would change the risk profile of the bank. We would be surprised to see this and our base scenario is that the lending capacity is increased gradually through its current lending programmes. We would expect such an announcement to be market positive and relatively neutral for EIB spreads.

European Strategy and Trades


11 May 2012

European Governments
Michelle Bradley +44 20 7888 5468 Florian Weber 44 20 7888 3779

Election fever has ended with the market back in risk-off territory following the result of the French and Greek elections. While both election results were as expected, the lack of a government in Greece has propelled the issue of a euro breakup to the top of the agenda again. A euro break-up is not our base-case scenario and even though the probability has increased, we think it is extremely unlikely the project will unwind over the next month. New Greek elections seem the likely outcome at this point but beyond that it is very difficult to have a clear view on where Greece will go. The positive news is that the EFSF has approved the next tranche of lending and so Greece has funds until June. The other main story was the news that the Spanish government has nationalized 45% of Bankia. Although the government was reluctant to provide further state aid, this proved to be the only option. Having sold off around 25 bp at the beginning of the week, Spanish government bonds rallied 7 bp on the day of the announcement.

Exhibit 12: 5Y Belgium vs. Austria

5Y Belgium to Bond Yield Spread (bps)




However, two other banking stories are worth noting this year. In our covered bond section, we discuss CIFEUR and the issues around the exchanged-based 5Y Belgium to Bond Yield Spread (bps) trading suspension. We think the details Source: Credit Suisse Locus on this story are worth watching for cases of further stress in the banking system. In the same way headlines around Dexia may be relevant. Belgium is hoping to renegotiate the guarantees that were agreed in October. At that time Belgium took 60.5% of the guarantees versus Frances 36.5%.
57.5 14-Apr-12 21-Apr-12 28-Apr-12 05-May-12

Take profits on long 5Y Belgium vs. Austria

In light of these discussion and the uncertainty around Belgium, we suggest taking profits on our recommendation to be long 5Y Belgium versus Austria. We suggested this on April 19 on the basis of a lack of supply in Belgium and upcoming supply in Austria. The Austria auction on May 8 was well bid and given Hungary is due to start negotiations with the EU, we think the headline risk around Hungary has reduced.

Trade Idea: Receive FRTR 5s10s30s fly

We believe the belly of the 5s10s30s fly in France is cheap versus the wings. We recommend receiving it at 47 bp. Exhibit 13 shows the 5s10s30s fly for France and Germany. Both flies appear to be correlated but since the end of March the 5s10s30s fly in France has cheapened while Germany has richened. The belly of the 5s10s30s fly in France now offers a pick-up of 47 bp compared to 30bp in Germany. We continue to expect long-end normalization with a steeper curve. This should see 10s richen further and therefore the 5s10s30s fly should move lower. We would expect the fly to richen to its 12-month average of 32 bp as the first target. The view is also supported by a regression of the fly on the 5s30s curve. The regression shows that the fly is cheap on the curve (Exhibit 14). According to the regression, the fair value would be 39 bp.

European Strategy and Trades


11 May 2012

Exhibit 13: 5s10s30s fly in France and Germany


Exhibit 14: 5s10s30s FRTR fly regressed on 5s30s

50 50 50 40
5s10s30s fly




20 0 10

-25 0.00 25.00 50.00 75.00 100.00 125.00 5s30s curve 150.00 175.00 200.00





5s10s30 France

Avg(5s10s30 France)

5s10s30s Germany

5s10s30s fly regression on 5s30s

Source: Credit Suisse Locus

Source: Credit Suisse Locus

The 10s30s curves in France and Germany are highly correlated. But the curves still have room to steepen in our view. Their historic maximum was 93bp in France and 99 bp in Germany (Exhibit 15) and they could move back to these levels. At the current level of 74bp for the 10s30s curve, the fly appears cheap. If the 10s30s curve steepens to its historic maximum, we expect the 5s10s30s fly to trade around 25 bp assuming the 5s10s curve remains at its current level of 123 bp (Exhibit 16).

Exhibit 15: 10s30s curve in France and Germany

Exhibit 16: 5s10s30s FRTR fly regressed on 10s30s

75 75 50

50 50

5s10s30s fly


25 25 0

40.00 01-Jul-02 30-Dec-04 01-Jul-07 30-Dec-09




60.00 65.00 10s30s curve






10s30s France

10s30s Germany (RHS)

5s10s30s fly regression on 10s30s

Source: Credit Suisse Locus

Source: Credit Suisse Locus

Exhibit 17 shows that the 5s10s curves in France and Germany are at their steepest levels in the last 10-years. In our March 9 EST: Holding Pattern, we recommended a 5s10s France-Netherlands box (Netherland steepener vs. FRTR flattener). The rationale is that the Dutch 5s10s curve is too flat and the French curve too steep compared to the German curve. A flattening of the 5s10s curve should move the 5s10s30s fly lower (Exhibit 18) assuming no change in the 10s30s curve.

European Strategy and Trades


11 May 2012

Exhibit 17: 5s10s curve in France and Germany

125 100 100

Exhibit 18: 5s10s30s FRTR fly regressed on 5s10s

50 75 75
5s10s30s fly

50 50


25 25 0 0 01-Jul-02 30-Dec-04 01-Jul-07 30-Dec-09 0 70.00 80.00 90.00 100.00 5s10s curve 110.00 120.00 130.00

5s10s France

5s10s Germany (RHS)

5s10s30s fly regression on 5s10s

Source: Credit Suisse Locus

Source: Credit Suisse Locus

Trade recommendation Receive FRTR 5s10s30s fly

Source: Credit Suisse

Cpn (%) 1.75 3.00 4.50

Maturity 25/02/2017 25/04/2022 25/04/2041

Yield % 1.60 2.81 3.55

Price 100.70 101.67 117.08

DV01 25,000 50,000 25,000

Repo (bps) 19 20 20

The risks are that the 5s10s curve steepens or the 10s30s flattens.

European Strategy and Trades


11 May 2012

UK Strategy
Thushka Maharaj +44 20 7883 0211

Exhibit 19: Summary of views

Metric Outright level of yields Curve Curvature Long end curve/ASW GBP-EUR spreads
Source: Credit Suisse

View Expect some resistance to these low yields Change in BoE tone and pause in QE consistent with 5s30s curve flattening 2s5s10s to remain driven by European sovereign performance Pause in QE favours short 5-10y ASW GBP 30y to outperform EUR

BoE signals pause in QE

Still too early to be pricing rate hikes
The BoE decided not to extend QE in May as we and the market were expecting. Short Sterling contracts sold off by 7-10bp following this, and gilts sold off between 4bp and 8bp after this announcement. We expect any sell-off to be limited, as we expect the BoE to keep the door open for more QE, if the situation warrants it. On this front, we look to the May Inflation Report next Wednesday to get more clarity on the current view within the MPC. We expect upward revisions to the inflation outlook and downgrades to the growth outlook a familiar story in the UK. The February Inflation Report showed expectations that inflation will reach 1.78% (median) at the 2y horizon. We expect some revision higher to this inflation forecast. However, we find it hard to see the MPC overtly signaling explicit rate hikes in a period of such uncertainty in Europe. We maintain our view that irrespective of whether we get more QE or not in coming months, the front end is expected to be fairly anchored. We had recommended receiving GBP 2s3s5s fly two weeks ago we still hold this recommendation. Events in Europe are likely to be a key driver of UK rates for the coming weeks added volatility in Greece (and the knock-on impact for other countries) is likely to support lower rates in GBP, especially in the front end. Even though there is a change within the MPC towards an inflation focus, we expect the MPC to be cautious on driving up Sterling and front-end rates too rapidly, which act to tighten monetary policy. Thus we expect them to balance a revision higher to inflation in the forecast with a more neutral tone at the Inflation Report press conference. We certainly expect the MPC to keep the door open for more QE (especially given that Spanish 10y yields have risen back above 6%). In the Money Market Section below we recommend fading the recent sell-off in Short Sterling to position ahead of the Inflation Report.

Taking stock of QE thus far

The BoE has bought 325bn in conventional bonds under the QE program, which is equivalent to 33% of conventional gilts outstanding and about 25% of total gilts outstanding. The different phases of QE conducted since March 2009 are shown in Exhibit 20. It was only in the last round of the program that the BoE changed the buyback baskets to shorts, mediums, and longs. We expect more clarity on the current decision to pause QE at the May Inflation Report next Wednesday. As discussed previously, we attribute the pause to the recent shift in tone towards inflationary concerns.

European Strategy and Trades


11 May 2012

Exhibit 20: Timeline for QE program in the UK

80 75 70 60 50 50 40 30 20 10 0 25 50 5-25y basket Aug-09 Basket extended to >3y Oct-11 Restarted program with baskets unchaged 75 Feb-12 baskets changed to DMO maturities 50

Source: Credit Suisse

Below we review the existing asset purchase program and the skew of purchases in the different rounds of the program. Exhibit 21 shows the nominal purchases per issue and above the graph we show the percentage of freefloat (Outstanding-DMO holdings) that the BoE owns. The main point to highlight here is that the BoE holds a large percentage of bonds in the belly of the curve. Given the QE program has been paused, we expect the 510y area to bear the brunt of any sell-off and maintain our view of 10s30s flattening (see our recommendation to pay GBP 5s10s30s in EST, 29-Mar-12). Below we also discuss selling 10y ASW spreads as another way to position for a pause in QE.

Exhibit 21: Nominal purchase amounts per bond for the entire program (the percentage of freefloat shown in brackets)
20,000 18,000 16,000 14,000 12,000 40% 35% 33% 24% 8,000 6,000 4,000 2,000 27% 6%
UKT 4.5% Mar-2013 UKT 8% Sep-2013 UKT 2.25% Mar-2014 UKT 5% Sep-2014 UKT 2.75% Jan-2015 UKT 4.75% Sep-2015 UKT 8% Dec-2015 UKT 2% Jan-2016 UKT 4% Sep-2016 UKT 1.75% Jan-2017 UKT 8.75% Aug-2017 UKT 1% Sep-2017 UKT 5% Mar-2018 UKT 4.5% Mar-2019 UKT 3.75% Sep-2019 UKT 4.75% Mar-2020 UKT 3.75% Sep-2020 UKT 8% Jun-2021 UKT 3.75% Sep-2021 UKT 4% Mar-2022 UKT 5% Mar-2025 UKT 4.25% Dec-2027 UKT 6% Dec-2028 UKT 4.75% Dec-2030 UKT 4.25% Jun-2032 UKT 4.5% Sep-2034 UKT 4.25% Mar-2036 UKT 4.75% Dec-2038 UKT 4.25% Sep-2039 UKT 4.25% Dec-2040 UKT 4.5% Dec-2042 UKT 4.25% Dec-2046 UKT 4.25% Dec-2049 UKT 3.75% Jul-2052 UKT 4.25% Dec-2055 UKT 4% Jan-2060

, mns

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service

Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12
Nominal purchases (% of freefloat shown above) 52% 52% 63% 62% 42% 70% 48% 44% 56% 20% 15% 19% 66% 58% 16% 10% 41% 42% 32% 34% 28% 38% 29% 26% 31% 32% 25% 56% 44% 10,000 31%

European Strategy and Trades


11 May 2012

Exhibit 22 compares the previous 75bn program versus last 50bn program (with changed baskets), which shows that the last round was more skewed towards purchases in the 5-10y area of the curve.

Exhibit 22: Nominal purchases in the last round of QE versus the previous round of 75bn
Nom inal purchas es (50bn, changed bas kets ) 5000 4500 4000 3500 Nom inal purchas es (75bn, unchanged bas kets )

, mns

3000 2500 2000 1500 1000 500 0

Source: Credit Suisse

Exhibit 23: As a percentage of total purchases, the last round was more focused in shorts
35 QE2 - % nom inal purchas es (50bn, changed bas kets ) QE2 - % nom inal purchas es (75bn, unchanged bas kets )

UKT_5_070914 UKT_2.75_220115 UKT_4.75_070915 UKT_8_071215 UKT_2_220116 UKT_4_070916 UKT_1.75_220117 UKT_8.75_250817 UKT_1_070917 UKT_5_070318 UKT_4.5_070319 UKT_3.75_070919 UKT_4.75_070320 UKT_3.75_070920 UKT_8_070621 UKT_3.75_070921 UKT_4_070322 UKT_5_070325 UKT_4.25_071227 UKT_6_071228 UKT_4.75_071230 UKT_4.25_070632 UKT_4.5_070934 UKT_4.25_070336 UKT_4.75_071238 UKT_4.25_070939 UKT_4.25_071240 UKT_4.5_071242 UKT_4.25_071246 UKT_4.25_071249 UKT_3.75_220752 UKT_4.25_071255 UKT_4_220160
We also see value in comparing the latest 50bn program (with changed baskets to DMO maturities) versus the 75bn program (with unchanged baskets) in percentage terms. The reallocation of purchases can be seen more clearly in Exhibit 23. Exhibit 23 shows the percentage of total nominal purchases in each maturity bucket as shown, under the most recent 50bn program (with changed baskets) a larger percentage of purchases were in <5y and 5-10y area of the curve. Now that the QE program has been paused, it makes sense to play for underperformance of 5s and 10s on the curve.

Exhibit 24: UKT 10y ASW spreads have richened sharply versus 5y ASW
70 30

% of total nominal purchases

30 25 20 15 10





5 0


















Residual maturity
Source: Credit Suisse

5y ASW rhs
Source: Credit Suisse

10y ASW

European Strategy and Trades


11 May 2012

Short 10y ASW spreads

Exhibit 24 shows that 10y ASW spreads have richened and now appear out of line with 5y spreads. As we have discussed previously, we find the 10y sector rich on the gilt curve and on the swap curve. We have recommended paying GBP 5s10s30s and a GBP 5y5y/10y5y flattener to fade the richness of the belly of the curve. Two other factors supporting selling 10y ASW spreads: 10y supply next week the UKT 5s 25s will be auctioned for 2.75bn; The recent pause in QE supports fading the richness of the 10y sector on an asset swap basis as well. Exhibit 25 shows that the 10y has richened on an asset swap basis versus 5y and 30y ASW spreads in line with the 5s10s30s yield fly. Exhibit 26 shows the 10y rate versus SONIA and shows that the 10y has richened progressively since the start of 2010. Following the pause in QE we expect some correction. Specifically, we recommend selling UKT 4s 22s versus swap at 36bp. We will track this with a 50K risk.

Exhibit 25: UKT 5s10s30s ASW fly 10y has richened sharply in the last month
30 0

Exhibit 26: UKT 10y has richened versus SONIA we expect a correction
40 10y SONIA - UKT 10y 20 0



-20 -40



-60 -80









23/02/10 23/05/10











GBP 5s10s30s rhs

Source: Credit Suisse PLUS Analytics

UKT 5s10s30s ASW fly

Source: Credit Suisse

Alternative expressions of this view: Sell 10y ASW versus 5s and 30s. Sell 10y gilts versus SONIA. Short 10y ASW versus 30y (10s30s ASW box). The risks to these recommendations include a further widening in FRA/SONIA basis or a sharp rally in gilts possibly due to more negative European headwinds.


European Strategy and Trades


11 May 2012

Derivatives Strategy
Panos Giannopoulos +44 20 7883 6947

Receive CHF 5s10s20s

In a trade note on 9 May 2012 we recommended receiving CHF 5s10s20s (see the original note for more details). We like receiving this fly due to what we see as an asymmetric payoff. The fly is too high given the low level of Swiss yields (see the original trade note for a comparison with Japan). In a further global fixed income rally, the belly would outperform in our view, while the downside in a sell-off should be limited.

L Z2/Z3 conditional bull steepener

Note that this is NOT a trade specifically targeting the inflation report. We believe it is a good risk/reward trade held for the medium term or even as expiry trade. Z2-Z3 has steepened 6bp (from 9bp up to 15bp) after the no QE announcement by the MPC; however, it remains at very flat levels by historical standards. We see value in expressing the steepener conditionally via calls. Mid-curve vol versus front vol is driven by the slope of short sterling. We currently find 1y mid-curve vol expensive relative to front vol when taking the slope into account (Exhibit 28). Despite the post MPC announcement sell-off, not much in terms of hikes is priced in 2013 contracts. Contracts out to Z3 are primarily driven by FRA-OIS. We think that if L Z2 rallies it would likely be driven by FRA-OIS tightening. FRA-OIS is actually more volatile for contracts closer to spot. If the 3rd IMM FRA-OIS is very elevated, then the 7th one tends to be lower, or if the 3rd is very low the 7th one tends to be higher (pricing the risk of a future blow-up in FRA-OIS). We think that if Z2 FRA-OIS falls below the 40bp-50bp area, then the term structure of FRA-OIS should be upward sloping (i.e., Z3 FRA-OIS would be higher than the Z2 one in that case). At the same time, we think that L Z3 should price a (small) risk of hikes. Therefore, we think that it would be highly unlikely for L Z2-Z3 to invert conditionally on L Z2 being above 99.00. An actual MPC cut in the next few months (not our central scenario) would actually be a bonus for the trade. We therefore recommend buying L Z2 99 call and selling 0LZ2 (Z2 expiry onto Z3) 99 call for 0.5 tick credit (futures ref 98.92, 98.77). The risk to the trade is an inverted FRA-OIS term structure at low outright levels. Or for example the market pricing risks of cuts by the MPC in 2013. Both risks are low in our view.

Exhibit 27: Trade details: L Z2/Z3 conditional bull steepener

Direction Buy Sell
Source: Credit Suisse

Amount 5,000 5,000

Product Call Call

Expiry Z2 Z2

Underlying L Z2 L Z3

Strike 99 99

Price 7.5 8

Future Ref 98.92 98.77

European Strategy and Trades


11 May 2012

Exhibit 28: Front versus mid curve vol is driven by short sterling slope; mid curve vol appears rich

Exhibit 29: 3 and 7 IMM FRA-Sonia basis






80 3rd FRA-Sonia

50 30 25


7th FRA-Sonia





10 0 01-Jul-11 30-Sep-11 31-Dec-11 31-Mar-12


Mar-10 Mar-11 Sep-09 Dec-09 Sep-10 Dec-10 Sep-11 Dec-11 Mar-12 Jun-09 Jun-10 Jun-11

6m 1y MC - 6m front vol (bp/ann)

Source: Credit Suisse Locus

L 3-7 (RHS)

Source: Credit Suisse Locus

European Strategy and Trades


11 May 2012

Money Market Strategy

Marion Pelata +44 20 7883 1333 Panos Giannopoulos +44 20 7883 6947

Going long Short-sterling

Looking at Thursdays sell-off on the short-sterling strip, following the MPC minutes, we think current prices are cheap and so we recommend going long shortsterling, specifically the Jun-14 contract at around 1.37. We aim for 10bp of outperformance, taking profit at Wednesdays level (98.73). Thanks to the steepness of the curve, this trade rolls positively for 7bp for three months.

Exhibit 30: Post-MPC sell-off on the ShortSterling strip




0.00 98.63



98.500 -1.00



Jun-12 Dec-12


Jun-14 Dec-14 Jun-15


Following last weeks Kings speech, L (Trade) L Z-score(Trade) L (Yesterday) Adam Posens u-turn, and this Source: Credit Suisse Locus weeks MCP minutes, markets are pricing for upward revisions to inflation (see UK section: BoE signal pauses on QE), leading to a more hawkish tone. In our view, we think that the Short-Sterling strip has moved higher too quickly as we find it premature to be pricing aggressive rate hikes in the UK while markets are still positioned for rate cuts in Europe. Looking at Exhibit 31 , markets are pricing too much of a risk premium in the UK relative to Europe for Jun-14 expiry. A risk to this trade is that the MPCs tone becomes more hawkish than expected and/or that the inflation report (16 of May) shows some significantly higher inflation expectations. However, we find it unlikely that these events may surprise on the hawkish side.

Exhibit 31: 18m3m FRA-OIS swaps in GBP seem over-priced relative to Euro
90 80 70 60 50 40 30 20 18m3m Libor-Sonia (bp) 18m3m Euribor-Eonia (bp) 60 55 50 40 35 30 25 20 45

Exhibit 32: Short-Sterling Jun-14 contract appears cheap, in our view

99 98.9 98.8 98.7 98.6 98.5 98.4 98.3 98.2 L H4 L M4

















Source: Credit Suisse

Source: Credit Suisse, the BLOOMBERG PROFESSIONAL service






European Strategy and Trades


11 May 2012

Covered Bonds
Sabine Winkler +44 20 7883 9398

CIFEUR: suspended from exchange-based trading

The Commission de Surveillance du Secteur Financier (CSSF) has been informed by the Autorit des Marchs Financiers (AMF) of the suspension of all Caisse Centrale du Crdit Immobilier de France 3CIF (CCCI) and CIF Euromortgage (CIFEUR) debt instruments from trading on Euronext Paris on 8 May 2012 pending the publication of a press release. In addition, the CSSF has required the suspension of said debt instruments from trading on the regulated market of the Luxembourg Stock Exchange until the market has been duly informed. Due to a request of the AMF, SIX Swiss Exchange has also suspended the trading of securities of CCCI and CIFEUR until further notice. The announcement of the suspension from exchange-based trading caused the asset swap spreads (ASWs) of CCCIs unsecured debt and CIFEURs covered bonds to widen by approximately 225bp and 45bp, respectively. On 10 May 2012, the ASWs of CIFEURs outstanding EUR-benchmark covered bonds with a time-to-maturity of at least one year were between m/s +70bp (4.5% CIFEUR 12/13) and m/s +160bp (4.125% CIFEUR 01/22). Although the ASWs of CIFEURs covered bonds have widened significantly, those of other French covered bonds have not (Exhibit 33). However, stress related to CIFEUR may spill over to other French lenders with a similar business model and credit profile.

Exhibit 33: Secondary market performance of CIFEUR and French covered bonds
180 160 140 120 100 80 60 40 20 0 -20 2/07 7/07 12/07 5/08 10/08 3/09 8/09
Source: Credit Suisse

bp CIFEUR covered bonds French covered bonds

1/10 6/10 11/10 4/11 9/11


A suspension of covered bonds from (exchange-based) trading without a statement of the lender is unusual. CCCI1 and CIFEUR have not yet published a press release providing insight into why the AMF has taken such action. The ASWs of CIFEURs covered bonds are likely to remain under pressure as long as uncertainty about the reasons for the AMFs action and the speculation about the group prevails. At m/s +92bp, French covered bonds are currently trading wider than those from Finland (m/s +33bp), Germany (m/s +26bp), Norway (m/s +38bp), the Netherlands (m/s +59bp), the UK (m/s +78bp), and Sweden (m/s +25bp).

Credit Suisse has not reviewed any third-party linked site contained herein and takes no responsibility for the content contained therein. Any such link is provided solely for your convenience and information. Following the link or any other link in Credit Suisse communications or on the Credit Suisse web site shall be at your own risk.

European Strategy and Trades


11 May 2012

CCCI and CIFEUR are subsidiaries of Credit Immobilier de France Development (CIFD) and have not yet published their annual reports for 2011. CIFDs issuer credit rating (ICR) is A (Fitch). CCCIs issuer credit rating is A (Fitch) and A1 (Moodys). CIFEURs covered bonds are rated triple-A by Fitch and Moodys. Fitchs and Moodys outlook on CIFEURs covered bonds is stable and negative, respectively. The ICR of the sponsor of CIFEURs covered bond programme (CCCI) is affected by Moodys bank credit rating reviews and is on review for downgrade and may be downgraded by up to four notches. If CCCIs ICR would be downgraded by four notches, CIFEURs covered bonds may be downgraded by two notches. Moodys determines a covered bond rating after applying a two-step process: expected loss and TPI framework analysis. The expected loss on a bond is modeled as a function of the sponsors probability of default, measured by its ICR, and the stressed losses on the collateral following sponsor default. The cover pool losses for CIFEURs programme are 8%. Based on the current TPI of Probable-High, the TPI Leeway for CIFEURs programme is two notches, i.e., CCCI would need to be downgraded to below A3 before the covered bonds are affected, all other things being equal. According to Moodys, at the end of 2011, over-collateralisation (OC) was 6.7% and committed OC was zero. According to Fitch, in March 2012, CIFEUR had outstanding covered bonds with a total volume of EUR 25bn. 76% of these bonds collateral (EUR 27bn) was residential mortgage-backed securities (RMBS). 96% of the collateral was from France. In March 2012, nominal OC was 6.4%. The D-Factor of CIFEURs covered bond programme is 15%, meaning that, all else being equal, the covered bonds could be AAA rated as long as the sponsors ICR is at least BBB. CIFEURs covered bond rating on a probability-of-default basis is AA+, i.e., the covered bonds relied upon a one-notch rating uplift to achieve a triple-A rating. In May 2012, the total outstanding volume of EUR-benchmark covered bonds from France was EUR 246bn (25% of the overall EUR-benchmark covered bond market) and the total outstanding volume of EUR-benchmark covered bonds of CIFEUR was EUR 16bn. Two CIFEUR EUR-benchmark covered bonds mature this year (EUR 3bn) one fell due at the end of April 2012. CIFEUR returned to the EUR-benchmark covered bond market in 2011, but did not yet access funding in this market in 2012. CIFEUR is reliant on capital market funding, and thus vulnerable to capital market volatility. Without providing the reason for the suspension, CIFEUR risks forfeiting the confidence of the capital markets.

European Strategy and Trades


11 May 2012

David Sneddon +44 20 7888 7173

A momentum sell for Global Risk Appetite should see risk off extend further
As we highlighted a couple of weeks ago, we were at a key inflection point for a variety of markets, and the subsequent price action has reinforced this scenario, with yields in Germany the clear beneficiary. What we have also seen though is a clear bearish cross by weekly MACD momentum for Global Risk Appetite. While the more reliable momentum signals are typically seen at/near euphoria and panic, and we are currently at a neutral level, nevertheless, this does increase pressure for the risk off trend of the past eight weeks to extend further, potentially all the way back to panic. Our bias though at present remains to see a fresh risk rally in due course, although if the current momentum sell signal is correct, this would suggest this may be delayed towards the end of Q2, maybe even into Q3. The clear beneficiary from the downturn in Risk Appetite has been bond market/safe assets, with 10yr Germany plummeting to new record lows below 1.63%, and is already at our 1.50/45% target. We look for this to hold for now, for a consolidation phase. Bigger picture though, while 1.76% holds, there is the risk for an overshoot beyond here to medium-term channel resistance at 1.35/30%, but with this expected to hold.

Exhibit 34: Global Risk Appetite & MACD Momentum - Weekly

MACD sell

Source: Updata, Credit Suisse

European Strategy and Trades


11 May 2012

Our main focus though is now on Spain, and Funding stresses. For 10yr Spanish yields, the three-week April recovery was contained by 40-day average and 38.2% retracement resistance at 5.65%, and the subsequent rejection off here maintains the January/April yield base, and the pressure on the 6.16/17% mid-April yield highs. Beyond here can see weakness extend to our 6.32/38% target the measured objective from the yield base and 78.6% retracement of the November/February recovery. It is here, we would then look for a fresh peak in 10yr Spanish yields. Above 6.38% would in our view put the market fully back in crisis mode, for a fresh look at the 6.78% high. Below 5.65% is needed to suggest the worst of the weakness may have been seen. What has been encouraging through the recent rally in risk appetite has been the significant improvement in various funding measures EURUSD Cross-Currency basis swap, EUR FRA/OIS helped in no small part by LTRO. The recent risk off phase and move higher in Spanish yields has as yet not impacted these measures to any serious degree, but we watch the EUR FRA/OIS especially closely. Here, the spread has stabilised above the 2010 and 2011 lows (at 18.62 and 18.29), and there is a risk a small head & shoulders reversal may be forming. Whilst not a particularly large structure, if completed, it would add weight to the scenario the current risk off phase has further to run. Key support is seen from the 37.25/50 recent highs. Only beyond here would suggest a base has been completed though, warning of a near-term increase in funding stresses for a move back to 41, then what should be much better support at 47/50 the target from the base, 38.2% retracement of the tightening from December and 200-day average. We would look for a fresh floor here. While 37.50 caps a base can be avoided, maintaining a benign funding environment.

Exhibit 35: 10yr Spain - Daily

Exhibit 36: EUR FRA/OIS (3-month vs IMM EONIA)

Source: Updata, the BLOOMBERG PROFESSIONAL service, Credit Suisse

Source: Updata, the BLOOMBERG PROFESSIONAL service, Credit Suisse

European Strategy and Trades


11 May 2012

EUR and UK Supply Analysis

Exhibit 37: Forward supply calendar
Week Day 20 20 20 20 20 20 20 20 20 20 20 21 21 21 21 21 21 21 21 22 22 22 22 22 22 23 23 23 23 23 23 23 23 24 24 24 24 24 24 24 24 24 Mon Mon Mon Mon Tue Tue Wed Thu Thu Thu Fri Mon Mon Mon Tue Tue Wed Thu Fri Date T-bills Issues 4.0 5.5* 7.5 3.0* 1.6* Bonds Issues IT SK/IT SK/IT FI UK DE FR FR/ES US/UK 21.6 EUR total 3.0 1.7* 7.5* 3.0* BE BGB 3Y* 2/3y BTP 15 3.0* SLOVGB 17 0.3* SLOVGB 16 0.3* RFGB 17 1.0* 5/7y 10y BTP 22 BTP 25 BTP 20 0.5* 0.5* 0.5* 15/20y >=30y Linkers

14-May Bubill 6M 14-May SGLT 12M & 18M 14-May BTF 14-May 15-May BTB 3M & 12M 15-May GTB 3M 16-May 17-May 17-May 17-May 18-May UK EUR total 21-May Bubill 12M 21-May DTC 3M & 6M 21-May BTF 22-May SGLT 3M & 6M 22-May 23-May 24-May 25-May UK EUR total Bubill 12M BTF BOT

UKT 5s 25s 3.5* Bund 22 5.0* 2.5* 1.5* SPGB 10Y* 1.0*

BTAN 2Y* 2.5* BTAN 4Y* BTAN 3Y* 2.5* SPGB 5Y* UKT 5s 14s** 1.5 8.0 0.5* BGB 5Y*

BTANi 5Y* 1.0* OATi 10Y* 0.8* 10Y Tips 11* 1.8

5.6 0.4*

7.5 BGB 10Y* 0.3*

NL DSL 15 3.0* US 2Y Note 35* DE/US New Schatz 14 5.0 US 8.5 CTZ 2Y* 2.9*

5Y Note 7Y Note

35* 29* 0.4 0.3 BTPei 10Y* 1.4*

15.2 EUR total 3.0 7.5* 9.0* IT IT IT

Mon 28-May Mon Tue Wed Wed Fri Mon Mon Tue Wed Wed Thu 28-May 29-May 30-May 30-May 01-Jun

BTP 5Y* CCT 6Y* 2.9

3.0* 2.25* 5.25

BTP 10Y* 2.5*

UK EUR total

19.5 EUR total 1.7* 7.5* 1.4* 3.0* DE FR ES SPGB 3Y*



04-Jun DTC 3M & 6M 04-Jun BTF 05-Jun 06-Jun PTB 6M & 12M 06-Jun BTB 3M & 6M 07-Jun

Bobl 17 OAT 5Y* 1.25 SPGB 5Y* * 1.25

5.0 2.5* 1.25* 8.75 2.0 BGB 20Y* 0.25* 1.75 OAT 10Y* 2.0* OAT 15Y* 1.5*

Thu 07-Jun Fri 08-Jun Mon Mon Tue Tue Wed Wed Thu UK EUR total

BE 13.6 EUR total

11-Jun Bubill 6M 11-Jun BTF 12-Jun BTB 3M & 12M 12-Jun SLOVTB 3M 13-Jun BOT 13-Jun 14-Jun

4.0 SK SLOVGB 3Y* 0.3* 7.5* 3.0* NL/AT/US 3Y Note 32* RAGB 10Y* 0.9* 0.1* UK UKT 1s 2017s 4.0* 7.5* DE Bund 22 5.0 US 10Y Note 24* IT/US BTP 3Y* 3.5* BTP 8Y* 2.5* UK

DSL 33

2.0* RAGB 30Y*


Thu 14-Jun Fri 15-Jun UK EUR total

30Y Bond UKT 4s 2060s 2.0

16* 2.0* 0.9

22.1 EUR total




*Estimates/Likely auction dates, **Syndications/Tenders/Mini-Tenders, *** USD denominated; Source: Credit Suisse, National Treasuries

European Strategy and Trades


11 May 2012

Exhibit 38: Cash-flow analysis Europe

Supply bn Week Date 20 14-May 20 15-May 20 16-May 20 17-May 20 18-May 21 21-May 21 22-May 21 23-May 21 24-May 21 25-May 22 28-May 22 29-May 22 30-May 22 31-May 22 1-Jun 23 4-Jun 23 5-Jun 23 6-Jun 23 7-Jun 23 8-Jun 24 11-Jun 24 12-Jun 24 13-Jun 24 14-Jun 24 15-Jun TOTALS Day Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Cntry FI, IT DE ES, FR BE NL DE Amt 6.10 5.00 11.55 1.20 3.00 5.00 4.30 7.75 5.00 8.50 0.25 0.30 3.80 5.00 6.00 72.75 Redemptions bn Cntry Amt 3.33 0.08 0.22 29.16 32.79 0-2 0.11 0.51 0.01 0.30 1.17 2.10 2-5 0.43 0.44 0.00 0.50 1.38 Coupons bn 5-7 0.00 0.36 0.31 0.67 7-10 0.41 0.41 10y+ 0.00 0.00 Total Cpn 0.43 0.11 0.00 0.95 0.02 0.66 2.39 4.57 Total Cash Inflow 0.43 3.33 0.11 0.00 1.03 0.24 0.66 31.55 37.36 Net Supply 6.10 -0.43 5.00 11.55 -3.33 1.09 3.00 5.00 4.30 0.00 7.75 -1.03 -0.24 5.00 8.50 0.25 0.30 3.80 5.00 5.34 -31.55 35.39 Net DV01 ( mn per bp) 1.99 (0.11) 4.72 4.56 0.60 0.87 0.92 1.52 (0.00) 4.18 (0.09) (0.00) 2.41 5.41 0.35 0.83 4.72 2.25 (0.40) 34.73






Supply 6.10 5.00 11.55 1.20 3.00 5.00 4.30 7.75 5.00 8.50 0.25 0.30 3.80 5.00 6.00 72.75

Source: Credit Suisse, National Treasuries;

Exhibit 39: Issuance, coupon & redemptions summary (, bn)

14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun Total
Source: Credit Suisse

Issuance 22.65 9.20 12.05 13.75 15.10 72.75

Coupon 0.43 0.11 0.95 0.02 3.05 4.57

Redempt. 3.33 0.00 0.08 0.22 29.16 32.79

Net Supply 18.88 9.09 11.02 13.51 -17.11 35.39

Exhibit 40: Year-to-date bond issuance (, bn)

Country Austria Belgium Finland France Germany Italy Netherlands* Spain Total Amount issued YTD in 2012 10 17 4 87 67 83 32 46 346 Expected issuance for 2012 22 26 15 178 170 209 60 86 766 % completed year-to-date 46% 65% 26% 49% 39% 40% 54% 53% 45% Amount issued in 2011 17 41 14 208 189 223 53 97 841

Source: Credit Suisse, National Treasuries, * USD issuance included

European Strategy and Trades


11 May 2012

Exhibit 41: Nominal supply vs. DV01

25 20 14 12 10 8 6 4 5 0 14-May- 21-May- 28-May- 4-Jun-8- 11-Jun18-May 25-May 1-Jun Jun 15-Jun Nominal Supply DV01
Source: Credit Suisse, National Treasuries

Exhibit 42: Euro issuance, coupon & redemptions by week (, bn)

40 30 20

million per bp


15 10


10 0

2 0

-10 -20
14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun




Net Supply

Source: Credit Suisse, National Treasuries

Exhibit 43: Net supply by country for the next five weeks - from 14-May-12 to 15-Jun-2012 (, bn)
25 20 20 15 15

Exhibit 44: Euro weekly net supply 2012 (, bn)

40 30





5 0 -5 -10 -15

5 2 1 1 1














Source: Credit Suisse, National Treasuries

Source: Credit Suisse, National Treasuries

Exhibit 45: Issued amount % completed YTD

70% 65%

Exhibit 46: UK issuance, coupon & redemptions by week (, bn)

30.0 20.0



53% 49% 46% 40% 39%








Source: Credit Suisse, National Treasuries

Source: Credit Suisse, UK Treasury

European Strategy and Trades

02 Jan-06 Jan 09 Jan-13 Jan 16 Jan-20 Jan 23 Jan-27 Jan 30 Jan-03 Feb 06 Feb-10 Feb 13 Feb-17 Feb 20 Feb-24 Feb 27 Feb-02 Mar 05 Mar-09 Mar 12 Mar-16 Mar 19 Mar-23 Mar 26 Mar-30 Mar 02 Apr-06 Apr 09 Apr-13 Apr 16 Apr-20 Apr 23 Apr-27 Apr 30 Apr-04 May 07 May-11 May 14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun 18 Jun-22 Jun 25 Jun-29 Jun 02 Jul-06 Jul 09 Jul-13 Jul 16 Jul-20 Jul 23 Jul-27 Jul 30 Jul-03 Aug 06 Aug-10 Aug 13 Aug-17 Aug 20 Aug-24 Aug 27 Aug-31 Aug 03 Sep-07 Sep 10 Sep-14 Sep 17 Sep-21 Sep 24 Sep-28 Sep 01 Oct-05 Oct 08 Oct-12 Oct 15 Oct-19 Oct 22 Oct-26 Oct 29 Oct-02 Nov 05 Nov-09 Nov 12 Nov-16 Nov 19 Nov-23 Nov 26 Nov-30 Nov 03 Dec-07 Dec 10 Dec-14 Dec 17 Dec-21 Dec 24 Dec-28 Dec



10.0 0.0 -10.0 -20.0 -30.0 -40.0

14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun




Net Supply


11 May 2012

Exhibit 47: Cash-flow analysis UK

Supply bn Week Date 20 14-May 20 15-May 20 16-May 20 17-May 20 18-May 21 21-May 21 22-May 21 23-May 21 24-May 21 25-May 22 28-May 22 29-May 22 30-May 22 31-May 22 1-Jun 23 4-Jun 23 5-Jun 23 6-Jun 23 7-Jun 23 8-Jun 24 11-Jun 24 12-Jun 24 13-Jun 24 14-Jun 24 15-Jun TOTALS Day Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Mon Tue Wed Thu Fri Cntry UK UK Amt 3.50 1.50 4.00 2.00 11.00 Redemptions bn Cntry Amt 25.61 25.61 0-2 0.93 0.93 2-5 0.41 0.41 Coupons bn 5-7 0.07 0.00 0.08 7-10 0.93 0.93 10y+ 0.54 5.78 6.32 Total Cpn 0.61 8.05 0.00 8.66 Total Cash Inflow 0.61 8.05 25.61 0.00 34.27 Net Supply 3.50 1.50 -0.61 -8.05 -25.61 0.00 4.00 2.00 -23.27 Net DV01 ( mn per bp) 5.04 0.17 (0.05) 1.87 4.53 11.56



Supply 3.50 1.50 4.00 2.00 11.00

Source: Credit Suisse, UK Treasury

Exhibit 48: UK weekly issuance, coupon & redemptions (, bn)

14 May-18 May 21 May-25 May 28 May-01 Jun 04 Jun-08 Jun 11 Jun-15 Jun Total
Source: Credit Suisse, UK Treasury

Issuance 5.00 0.00 0.00 0.00 6.00 11.00

Coupon 0.00 0.61 0.00 8.05 0.00 8.66

Redemption 0.00 0.00 0.00 25.61 0.00 25.61

Net Supply 5.00 -0.61 0.00 -33.66 6.00 -23.27

Exhibit 49: Year-to-date UK bond issuance (fiscal year, , bn)

Country UK Amount issued in 2011-12 177,587 Amount issued YTD in 2012-13 25,912 Expected issuance for 2012-13 162,500 % completed year-to-date 15.95

Source: Credit Suisse, National Treasury

European Strategy and Trades


11 May 2012

Exhibit 50: Total issuance fiscal year-to-date (, mn)

YTD Total Sales Target for the Year % completed % Remaining Short Term 9,393 50,400 19% 81% Medium Term 4,136 34,500 12% 88% Long Term 9,424 37,200 25% 75% Total Conventional 22,953 122,100* 19% 81% Index Linked 2,959 35,300* 8% 92%

Source: Credit Suisse, * total conventional and index linked issuance does not include 8bn in mini-tender

Exhibit 51: DMO issuance calendar

Operation Date 15-May-2012 17-May-2012 12-Jun-2012 14-Jun-2012 21-Jun-2012 26-Jun-2012 Gilt Name 5% Treasury Stock 2025 5% Treasury Stock 2014 (Mini-tender) 1% Treasury Gilt 2017 4% Treasury Gilt 2060 New Conventional gilt 2022 0.125% Treasury Gilt 2029 Nominal Amount Issue (, mn) 3500* 1500* 4000* 2000* 3500* 1400*

Source: DMO, Credit Suisse, * forecasts

European Strategy and Trades


11 May 2012

Exhibit 52: Credit Suisse interest rate forecasts
Euro - German Benchmarks ECB Repo 2-Yr Yield 5-Yr Yield 10-Yr Yield 30-Yr Yield 2s5s 2s10s 10s30s 2s5s10s 5s10s30s UK Gilts Base Rate 2-Yr Yield 5-Yr Yield 10-Yr Yield 30-Yr Yield 2s5s 2s10s 10s30s 2s5s10s 5s10s30s
Prices as of 10 May 2011 Source: Credit Suisse

Current 1 0.07 0.51 1.51 2.21 43 144 70 -56 30 Current 0.5 0.38 098 1.96 3.23 59 156 127 -38 -30

2012 Q2 1 0.20 1.00 2.00 2.60 80 180 60 -20 40 2012 Q2 0.5 0.45 1.00 2.20 3.30 55 175 110 -65 10

2012 Q3 0.75 0.20 1.10 2.20 2.80 90 200 60 -20 50 2012 Q3 0.5 0.45 1.10 2.25 3.40 65 180 115 -50 0

2012 Q4 0.75 0.20 1.35 2.45 3.00 115 225 55 5 55 2012 Q4 0.5 0.50 1.25 2.30 3.50 75 180 120 -30 -15

2013 Q1 0.75 0.40 1.45 2.55 3.20 105 215 65 -5 45 2013 Q1 0.5 0.50 1.30 2.35 3.55 80 185 120 -25 -15

Exhibit 53: European inflation forecasts

Euro Area HICP ex-tobacco Index May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 115.60 115.60 114.80 115.00 115.70 116.20 116.20 116.60 YoY 2.54 2.54 2.45 2.45 2.32 2.43 2.35 2.36 MoM 0.09 0.00 -0.69 0.17 0.52 0.43 0.09 0.34 French CPI ex-tobacco Index 125.31 125.32 124.73 125.28 125.16 125.66 125.84 126.39 YoY 2.38 2.31 2.29 2.19 2.18 2.39 2.31 2.33 MoM 0.29 0.01 -0.47 0.44 -0.10 0.40 0.14 0.44 Index 243.8 244.3 243.9 244.8 245.4 245.8 246.2 247.1 UK RPI YoY 3.3 3.5 3.6 3.3 2.9 2.9 2.9 2.8 MoM 0.41 0.21 -0.16 0.37 0.25 0.16 0.16 0.37

Source: Credit Suisse

European Strategy and Trades



Eric Miller, Managing Director Global Head of Fixed Income and Economic Research +1 212 538 6480 US RATES Carl Lantz, Director US Head +1 212 538 5081 Ira Jersey, Director +1 212 325 4674 Scott Sherman, Vice President +1 212 325 3586 Michael Chang, Vice President +1 212 325 1962 Carlos Pro, Associate +1 212 538 1863 Eric Van Nostrand, Associate +1 212 538 6631 EUROPEAN RATES Helen Haworth, CFA, Director European Head +44 20 7888 0757 Michelle Bradley, Director +44 20 7888 5468 Sabine Winkler, Director +44 20 7883 9398 Panos Giannopoulos, Director +44 20 7883 6947 Thushka Maharaj, Vice President +44 20 7883 0211 Florian Weber, Associate +44 20 7888 3779 Marion Pelata, Analyst +44 20 7883 1333 marion.pelata LOCUS ANALYTICS (US AND EUROPE) Jennifer Drag, Director Locus Analytics Specialist +1 212 538 4303 PARIS Giovanni Zanni, Director European Economics Paris +33 1 70 39 0132 SINGAPORE Jarrod Kerr, Director +65 6212 2078 TOKYO Kenro Kawano, Director Japan Head +81 3 4550 9498 Shinji Ebihara, Vice President +81 3 4550 9619 US DERIVATIVES George Oomman, Managing Director Derivatives Head +1 212 325 7361 TECHNICAL ANALYSIS David Sneddon, Managing Director +44 20 7888 7173 Steve Miley, Director +44 20 7888 7172 Christopher Hine, Vice President +1 212 538 5727 Pamela McCloskey, Vice President +44 20 7888 7175 Cilline Bain, Associate +44 20 7888 7174

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