Weekly Eurobonds 2010_05_04

Themes of the Week

Greece has placed Tbonds with oversubscription and pushed the whole yield curve down.
Now the investors are to define conceptually - whether there will be a happy end of Greece story or not. The decision regarding the further bets should be based on an outcome for such dilemma. Theoretically, Tbonds seemed even strengthened, because today is only 4 May, and the notorious date of payment by Greece within bonded debt is 19 May, i.e. approximately in two weeks.

During this time, there may be many surprises, which in general will help Tbonds, if not to grow in terms of prices, then at least to stay at the current levels. From the strategic point of view, it is reasonable to take short positions. But the question about a timeline arises. The important thing for investors is not to catch a falling knife. As the saying goes, one learns from the past mistakes, and we have learned from Greece bond performance. The yields have returned to those levels, when positions were opened. We would suggest not to fix profit, but to add a barrier option instead - it will protect in the event of Germany and the IMF change their minds, but, rather Greece itself will do it, we have repeatedly seen such a situation. Here politics is being involved, though, fin our view, this government is not destined to be re-elected. Perhaps, it is worth trying to fight the tiger? Strikes have already been in play.

Market risks are still high. Imbalance between yen/US dollar - Treasuries turned to a standard correlation “national currency/debt”, i.e. with dollar strengthening we will see the reduction in yields on U.S. Treasuries. It takes some time to confirm or refute our hypothesis.
In general, prior to the first half of May Tbonds should remain in favor, the other members of PIIGS may accompany Greece in the creation of a “correct’ news background. Last week the media were full of headlines about these countries. A series of ratings’ downgrades by international agencies passed, and in addition, there is the CDS performance, spread of sovereign debt to the debt of Germany, the growth yield of sovereign bonds. It is possible that Spain would soon apply to the European Union and the International Monetary Fund requesting for a bailout.

We believe that Tbonds will be at the current levels or even have a chance to grow in terms of prices within a week, we suggest look for the proper moment to enter short positions - the main pressure is coming from offerings on the primary market (next week 3-, 10-, 30- year bonds are planned to enter the market, the amounts of issues have not been announced yet), upbeat macro statistics are coming out.

Our strategic view is the same: do not buy the market, buy the idea.