1. finance
2. investing
3. stocks

Deutsche Bank
Markets Research
Global
Rates
Gov. Bonds & Swaps
Inflation
Rates Volatility
Special Report
Date
9 October 2014
Bipolar trading for a bipolar world - Top
Fixed Income Trades for the Autumn
Trade #1: The difficulty of “normalization” – Buy USD 3M5Y receiver spreads
and bearish conditional swap spread wideners
Trade #2: Cheaper than a cheap breakeven – USD 5s10s steepener hedged by
paying 20% 2Y
Trade #3: The trillion euro trade – Receive June-16 Eonia
Trade #4: Viva Italia - Buy 1.5% BTPS Aug-19
Trade #5: Flat out - GBP 5Y-10Y steepener
Trade #6: Cheaper Yen but dearer JGBs - Buy 20Y JGB on ASW basis
Trade #7: Fed up down under - AUD 6M fwd 1Y vs. 3Y steepener
Trade #8: Give me a break - Long USD 2Y fwd 2Y inflation breakevens
Trade #9: Bad Grade Good - Buy EUR single-B credit
Trade #10: Turn weakness into strength - Buy weaker Spanish and Italian
covered bonds
Trade #11: Riding the ECB liquidity wave - Buy new issue CMBS
Research Team
Europe
Sebastian Barker
Nick Burns
Alex Duering
Paul Heaton
Markus Heider
Conor O’Toole
Rachit Prasad
Soniya Sadeesh
Jerome Saragoussi
George Saravelos
Abhishek Singhania
Bernd Volk
Francis Yared
Americas
Steven Abrahams
Aleksandar Kocic
Dominic Konstam
Alex Li
Daniel Sorid
Stuart Sparks
Steven Zeng
Oleg Melentyev
Asia Pacific
Kenneth Crompton
David Plank
Makoto Yamashita
________________________________________________________________________________________________________________
Deutsche Bank AG/London
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 148/04/2014.
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Overview
The last four months have been marked by weaker
growth in Europe and Emerging Market countries and
downward surprises to inflation globally driven,
amongst other, by materially weaker commodity prices.
The US economy has remained the bright spot, with
the unemployment rate reaching post crisis low, a
strong rebound of growth in Q2 after a weak Q1, and
the business surveys pointing to sustained momentum
into Q3. In this macro environment, the divergence
between central banks has been stark. The Fed is about
to complete its asset purchase programme and, is
expected to normalise policy in 2015. The ECB has
followed up the TLTRO with its own asset purchase
programme and has implicitly endorsing a EUR1trn
targeted increase in its balance sheet. Bond markets
have perform well, with Bund yields making new lows,
the US and UK curves bull flattening and breakevens
tightening significantly globally. In credit, High Yield
has underperformed (especially in the US), but
peripheral bond markets have remained resilient (with
the exception of Greece).
Given this backdrop, we have each identified the best
trades in our markets unconstrained by a top-down
macro view. Two strong themes have emerged from
this bottom up process: (1) yield curve are excessively
flat and the current combination of expected policy
normalisation in the US and the UK and depressed
inflation expectations cannot be sustained (2) carry
remains king in Europe thanks to an ECB which is
ultimately determined to do “whatever it takes”
Fading the excess flatness of yield curves
On almost any metric, yield curves are too flat, in the
US, the UK and Australia. The market is pricing both
policy tightening in the US and depressed inflation
levels. Something will have to give. There are several
(non-mutually exclusive) ways the curve could
normalise back. First, inflation breakevens could
normalise from depressed levels, and we express this
with a long USD2Y2Y breakeven. Second, the front-end
of the US curve could rally as the market prices a delay
in the normalisation of monetary policy in the US, and
we express this via a USD3M5Y receiver spreads. Third,
one could be agnostic about what will drive the
normalisation and the curve could steepen back, and
we express this via a GBP5s10s steepener. Fourth, one
could hedge the directionality of the curve with frontend rates and trade the excess flatness more directly.
We express this view with a USD 5s10s steepener vs. a
(beta weighted) short in USD2Y. The latter trade
happens to also be an efficient way to proxy for a
widening of breakevens. Finally, one can trade the
normalisation of the USD curve via other markets and
we express this via AUD 6M fwd 1Y vs.3Y steepener
which has flattened as 10Y UST yields have rallied over
the past few months
Page 2
Carry remains king in Europe
The theme in Europe remains very much focused on
carry, with a particular emphasis on the impact of the
forthcoming ECB intervention. The ECB is unlikely to
reach its implicit balance sheet target with the
measures announced so far. Its willingness to try and
ultimately to do “whatever it takes”, has nonetheless
important implications. Given the relative reluctance to
cross the public QE Rubicon at this stage, the ECB is
likely to be more aggressive in implementing its private
asset purchase programmes. This should support the
targeted assets, and we recommend being long the
weaker covered bonds in Spain and Italy and new issue
CMBS focusing on the front pay level, where liquidity is
greatest and spreads range from around 90bps Dutch
CMBS to around 125bps for Italian CMBS. Also, the
front-end of the euro curve is only pricing a marginal
increase in the overall size of the ECB’s balance sheet.
Even if the ECB is unable to increase its balance sheet
by the advertised EUR1trn, it should manage to
accumulate more than the ~EUR200bn implied by the
Eonia market. We thus recommend being long June-16
Eonia. Finally, the combination of lower front-end core
rates and tighter peripheral covered bonds should
together imply lower peripheral bond yields. The latter
is also supported by a favourable funding dynamics
thanks to positive current accounts and the support of
the ECB via the TLTRO. We thus recommend being
long 5Y BTPs outright.
Performance of the summer top trades
The Fixed Income Top trades for the summer (see
Appendix) have performed reasonably well. The trades
have a hit ratio of 72%. For the trades where the
performance was measured in bp, the average P&L
was +4.3bp while for the trades where the
performance was measured in % terms the average
P&L was +0.1%.
The DB Fixed Income Team
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #1: The difficulty of “normalization” – Buy USD 3M5Y receiver spreads and bearish
conditional swap spread wideners
„
We continue to see scope for the market to lower
the cyclical terminal funds rate due to the fragility
of profits and hence risk asset prices. Both the
2y1y and 3y1y rate look cheap on the curve. We
favor buying OTM receiver spreads on 5y tails
Sell FVH5 puts versus payers swaptions
A more aggressive Fed might carry on with what we
perceive as attempts to increase risk premia and raise
volatility to smooth the impact of prospective rate
hikes.
„
As a hedge to a more aggressive Fed attempt to
inject volatility into the market, we note that a
modest vol premium in FV futures options allows
investors to construct conditional bearish swap
spread wideners at zero premium strike spreads
better than the forwards. We would expect these
structures to perform well if a more hawkish Fed
undermines risk asset valuations and increases
hedging flows in swap spreads consistent with the
“Taper Tantrum” experience during 2013
If risk assets are not able to withstand higher rates,
then the reaction could be a wobble in valuations akin
to that of late spring/early summer 2013. During the
Taper Tantrum of 2013 investors hedging spread
product used swap spreads as a hedging vehicle, and
given the lower volatility of swap spreads relative to
corporate spreads, were obliged to over-hedge from
the perspective of notional principal versus the
underlying asset being hedged. The result could be a
sharp and (bearish) directional widening of spreads
much like that experienced during the Taper Tantrum.
Such a market dynamic would be conducive to
conditional spread wideners such as selling FV puts
and buying the analogous swaption with maturity
matched underlying rate.
„
Buy 3m5y -25/-50 receiver spread for 16bp up front
Figure 2: Correlation of swap spreads and IG OAS
during Taper Tantrum
170
Given the strike spread and premium the payout ratio is
7.5:1. The maximum loss is the premium outlay. The
maximum profit is the strike spread (adjusted to up
front terms) less the premium outlay.
IG USD OAS
160
USSP5
USD IG OAS, bp
150
Figure 1: Cheapness in the 5y sector: curve neutral
2y/2y2y/4y2y butterfly
60
20
140
15
130
120
10
110
100
80
25
5y swap spread, bp
Buy 3m5y OTM receiver spreads
Investors can achieve 7.5:1 payout ratios by buying 3m
OTM receiver spreads on 5y tails. Both the 2y1y and
3y1 rate look cheap on the curve from the perspective
of a DV01 and curve neutral butterfly with risk weights
derived from 10y of history.
5
90
Curve neutral fly
80
0
40
BP
20
0
Source: Deutsche Bank
-20
-40
-60
-80
Source: Deutsche Bank
If we are right that risk asset valuations aren’t yet
“ready” for tighter policy – for example the coefficient
of (log) S&P500 prices on real yields from a regression
versus breakevens, real yields, and DXY has turned
negative and increasingly so post crisis – then the Fed
will at best be forced to hike haltingly and at worst will
be prevented from “normalizing” fully even to our
2.75% estimate of equilibrium funds. This would lead
the market to re-price the terminal rate lower and
would favor the 5y sector of the curve, in our view.
Deutsche Bank AG/London
„
Sell 1,000 FVH5 117 puts versus buy $117mm
2.155% payers expiring February 20, 2015 into
swap commencing April 6, 2015 and maturing May
31, 2019 for zero premium
At the time of writing the FVH5 strike was just over
23bp OTM. Due to the vol premium of FV over
swaptions, the zero premium strike spread of 10.8bp is
1.75bp better than the invoice spread, which was
12.6bp.
The risk to the trade is that spreads tighten in a sell off.
The maximum loss and maximum gain are in theory
unlimited provided strikes are crossed. If strikes are
not crossed, i.e. the market rallies, then both options
expire worthless. We recommend observing a stop
level of 8bp in terms of the underlying invoice spread
targeting 10bp of spread widening.
Stuart Sparks
New York, +1 (212) 250 0332
Page 3
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #2: Cheaper than a cheap breakeven – USD 5s10s steepener hedged by paying
20% 2Y
„
„
USD5s10s steepener vs. pay 2Y (20% weight) to
hedge the long-term negative directionality of the
trade with monetary policy (i.e. USD2s5s10s with
DV01 weightings -20%/100%/-100%). Current 87bp,
Target 105bp, Stop 75bp.
USD5s10s is historically flat against fundamentals
and long-term breakeven inflation levels are
already depressed. The curve is already pricing
significant
spillovers
from
Europe
and/or
disinflation risks. By removing the directionality of
the slope with the short rate, the trade provides a
cheap long exposure to the inflation risk premium.
Figure 1: US 5s10s slope excessively flat
Theoretical slope implied by the model
(2Y rate, 5Y5Y BE, risk aversion, rates
vol, expected deficit)
USD 5Y-10Y swap slope
160
140
120
100
80
60
40
20
0
The USD 5s10s slope has flattened significantly since
the beginning of the year. The flattening was
successively driven by (1) normalization from
excessively steep levels following tapering, (2)
accumulation of US dollar reserves notably by China
via its interventions to depreciate the CNY and (3)
pricing of global disinflation risks and higher QE
expectations out of Europe.
The USD slope is now at historically flat levels relative
to fundamentals summarized by: (a) short term rates (b)
long-term inflation expectations (which are already
depressed) (c) expected fiscal deficits (d) rates volatility
and risk aversion (see Figure 1). The current excess
flatness could be attributed to the spillover from global
monetary policy easing (e.g. ECB QE) and/or global
disinflationary pressures. However, the excess flatness
of the curve already exceeds the levels observed at the
height of QE infinity, the market already embeds ECB
QE expectations and valuations in US breakevens are
already depressed (see Figure 1 and 2).
-20
04
05
06
07
08
09
10
11
12
13
14
Source: Deutsche Bank
Figure 2: 2Y/5Y/10Y butterfly -20%/100%/-100%
170
USD 2s5s10s -20%/100%/-100% butterfly (in bps)
160
150
Bond market
conundrum
140
130
120
105
tgt
110
100
QE2
90
85
80
Lehman
crisis
70
60
EU crisis,
Twist and
QE infinity
75
SL
50
03
04
05
06
07
08
09
10
11
12
13
14
Source: Deutsche Bank
From a macro perspective, the risks to an outright
steepener would come from a more aggressive pace of
tightening (bear flattening) or a rise in risk
aversion/disinflation (bull flattening). Given that the
Fed’s favourite measure of 5Y5Y breakeven is now as
low as it was at the peak of the Lehman and eurozone
crises, the bull flattening risk should be reduced.
Indeed, from current levels, it is unlikely that breakeven
could tighten materially, or risk aversion rise without
some pricing out of rate hike expectations. On the
other hand, current Fed Funds pricing is more benign
than the dovish centre of the FOMC’s forecast. Thus,
we favour a beta weighted short in 2Y rate (20% DV01)
to mitigate the bear flattening risk. The 2s5s10s -0.2/1/1 trade is also a good and cheap proxy for the already
depressed Fed 5Y5Y breakeven (see Figure 3) and it
benefits from positive carry of 2bp over 3 months
(unlike a long 5Y5Y CPI swap position which suffers
from negative roll by -2.5bp over 3 months).
Figure 3: Trade provides cheap and carry efficient
exposure to US 5Y5Y BE
3.4
160
3.2
140
3.0
2.8
120
2.6
2.4
100
2.2
80
2.0
1.8
60
USD 2Y-5Y-10Y butterfly -20%/100%/-100% (lhs)
40
Fed measure of 5Y5Y BE (rhs)
1.6
1.4
1.2
20
1.0
04
05
06
07
08
09
10
11
12
13
14
Source: Deutsche Bank
Jerome Saragoussi,
Page 4
New York, +1 (212) 250-3529
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #3: The trillion euro trade – Receive June-16 Eonia
„
Receive Jun-16 IMM Eonia at -2.5bp. Target:
-12.5bp, Stop-loss: +2bp
ECB is targeting a EUR 1trillion balance sheet
expansion
ECB targets a EUR 1trillion balance sheet expansion
The ECB has stated that one of the aims of its recently
announced policy measures is to steer its balance
sheet size back towards the levels of early 2012. This
would imply an increase in balance sheet and excess
liquidity of about EUR 1trillion. The measures
announced so far, i.e. the TLTROs, CBPP3 and ABSPP,
do not appear to be sufficient enough to achieve the
target. However, Draghi’s statements suggest that the
ECB remains willing to do what is necessary to achieve
this target including government bond QE.
EUR 1
trillion
2,500
2,000
1,500
1,000
500
0
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Source: Deutsche Bank, Bloomberg Finance LP
Excess liquidity at EUR 500bn could see Eonia at -15bp
120%
Jan-10 to Dec-12
(Eonia - Depo) / (Refi - Depo)
Trough in Eonia rates should occur later
The trough in Eonia rates should occur when excess
liquidity at its peak assuming that the refi and deposit
facility rates remain unchanged. The current trough in
Eonia rates is seen in H2 2015 at -8bp with rates rising
to -2.5bp by June-16. The limited take up of the first
TLTRO (EUR 83bn) and the expected slow pace of
purchases of private sector assets leads us to believe
that the balance sheet expansion of the ECB is likely to
be slower than expected. We would recommend
receiving June-16 Eonia at -2.0bp. The trade has a
positive carry of 2.5bp over 3 months. We would target
-12.5bp with a stop loss of +2bp.
ECB balance sheet size (EUR bn)
3,000
Jan-07
Less than half of that could result in Eonia rates at ~15bp
An increase in the ECB’s balance sheet size and excess
liquidity should result in Eonia rates trade lower and
closer to the ECB’s deposit facility rate. Historically,
with even around EUR 500bn (EUR 350bn higher than
current level) of excess liquidity in the system Eonia
rates have traded at around 20% of the spread
between the deposit facility rate & main refinancing
rate. The current levels of -20bp and +5bp for these
rates would imply that with EUR 500bn of excess
liquidity Eonia could trade at around -15bp.
3,500
100%
Jan-13 onwards
Current maintenance period
80%
y = -0.1528ln(x) + 1.0853
R² = 0.7256
60%
40%
20%
0%
0
200
400
600
Excess liquidity in EUR bn
800
Source: Deutsche Bank, Bloomberg Finance LP
Trough in Eonia should occur later than currently
priced in
0.5
1.0
0.0
-1.0
Abhishek Singhania
London, + 44 (207) 547 4458
-2.0
-2.0
-3.0
-4.0
-5.0
-4.4
-4.5
-6.0
-7.0
-8.0
-5.7
-6.1
IMM Eonia (bp)
-7.1
-7.4
Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
Source: Deutsche Bank, Bloomberg Finance LP
Deutsche Bank AG/London
Page 5
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #4: Viva Italia– Buy 1.5% BTPS Aug-19
„
Buy BTPS 1.5% Aug-19 at 1.03%, target 0.90% and
stop loss 1.20%
Italy still trades wider than Main and Senior Financials
700
Italian sovereign should rally on further ECB easing
Despite the significant rally in peripheral spreads they
remain wider than other credit spreads such as iTraxx
main and senior financials. Over the course of 2009,
while the financial markets were still under stress but
before the start of the Eurozone sovereign debt crisis
Italian 5Y ASW spreads were on average ~80bp tighter
than iTraxx main and senior financial spreads while at
the moment Italian spreads are at the same level as
these spreads. The current environment of low yields
and the potential for further ECB easing remains
conducive for further, albeit limited, rally in the
periphery. The recent weakness in activity and inflation
data over the past few months could be a concern from
a medium-term perspective. However, the ECB is likely
to be cognizant of the impact on lending to the real
economy and inflation expectations should peripheral
yields rise and hence the potential for yields to increase
meaningfully should be limited.
iTraxx Main 5Y
Itraxx snr Financial 5Y
600
Italy 5Y ASW
500
400
300
200
100
0
-100
Jan-08
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Deutsche Bank, Bloomberg Finance LP
Italian banks’ buying of government securities
93,540
100,000
80,000
Prospect of govt. bond QE favours outright long rather
than spread tighteners
In case of a GDP/ECB capital key weighted govt. bond
QE while peripheral sovereign bond yields will rally
core government bond yields could rally even further.
In fact, relative to the outstanding amount of
marketable
debt,
ECB
buying
is
likely
to
disproportionately benefit Bunds relative to BTPs.
Therefore, we would recommend going long BTP
outright rather than on a spread vs. Germany.
Jan-09
Change in Italian banks'
holdings of domestic govt.
securities (EUR mn)
60,000
46,046
38,913 36,368
40,000
20,000
3,835
14,921
8,909
0
-350
-20,000
2007
2008
2009
2010
2011
2012
2013
2014
Source: Deutsche Bank, ECB
Domestic banks have stayed away from this market
Due to AQR/stress test related concerns domestic
banks in the periphery have not been active buyers of
peripheral sovereign debt over the past few months. In
the current environment where the growth outlook
does not look robust and yields remain low it is highly
unlikely that domestic banks will be looking to reduce
their holdings of sovereign debt. The additional liquidity
obtained via the TLTROs should benefit the front-end of
the peripheral curves. The significantly lower volatility
of the total return performance of the 3Y-5Y sector vs.
the 7Y-10Y sector leads us to prefer being long 5Y Italy.
3M total return volatility of 3Y-5Y sector lower than
that of the 7Y-10Y sector
20%
Italy 3Y-5Y sector
15%
Italy 7Y-10Y sector
10%
5%
0%
-5%
We recommend going long the 1.5% Aug-19 BTP at
1.03%. We target a yield level of 0.90% with a stop loss
at 1.20%. The 3M carry and roll down on the trade are
+8bp and +5bp respectively.
Abhishek Singhania
Page 6
London, +44 (207) 547 4458
-10%
-15%
-20%
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Source: Deutsche Bank, Bloomberg Finance LP
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #5: Flat out - GBP 5Y-10Y steepener
„
GBP 5Y-10Y Steepener. Current 55bp, Target:65bp,
Stop:45bp, 3m carry +3.8bp
Relentless flattening over 2014
3.5
The 5Y10Y slope currently at the flattest levels this year
(and post crisis), as the front end prices in expected
hikes from the BoE, and the long end was more
recently, dragged along with the flattening of EUR
curves, which reflect rising deflation risks and
expectations of additional easing from the ECB.
We see current valuations as asymmetric in that sell off
need not flatten the curve given the starting point looks
excessively rich, while conversely there is room to take
out hikes should conditions deteriorate.
While the UK data has been largely resilient, there are
some signs that momentum is slowing from the strong
levels seen in the first half of the year; that said, the
data does not signal a sharper than expected
slowdown.
10Y
110
100
2.5
90
2
80
70
1.5
60
1
50
0.5
Jan-13
40
Jul-13
Jan-14
Jul-14
Source: Deutsche Bank, Bloomberg Finance LP
Excess Flatness of 5Y10Y
40
Residual 5y10Y
30
Conversely, the risk is for better data out of the UK, in
particular a long awaited pick up in wage data, against
an already diminished rate profile – here however,
given the starting excess flatness of the slope, it should
have less of a flattening impact.
120
5Y10Y
3
The risks stem from the Eurozone, where recent data
indicates a slowdown in growth momentum. The MPC
was already concerned over developments in the Euroarea - recent data will not be encouraging, and will
likely argue for a “wait-and-see” approach to judge
developments in the near term
Further disappointments in the data raise the risk that
the market challenges the ECB, which is also likely to
result in UK rate hike pricing being questioned, given
the economic linkages. While policy failure could result
in flattening of EUR slopes, there is much more to price
out in terms of policy normalization in GBP curves. 2Y
EUR OIS for example is flat to overnight Eonia, while
the same is certainly not true in the case of GBP.
5Y
20
10
0
-10
-20
-30
vs short rates, fwd breakevens, vol, risk
and expected deficits
-40
04 05 05 06 07 07 08 08 09 09 10 11 11 12 12 13 14 14
Source: Deutsche Bank
EUR drag should be on the front end
180
5Y EUR OIS - o/n
160
5Y GBP OIS-o/n
140
120
100
Soniya Sadeesh London, +44 (207) 547 3091
80
60
40
20
0
-20
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
Jun-14
Source: Deutsche Bank
Deutsche Bank AG/London
Page 7
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #6: Cheaper Yen but dearer JGBs - Buy 20Y JGB on ASW basis
„
„
20y JGBs look cheap to swaps despite recent yen
depreciation, and we therefore expect cash bonds
to outperform in the event that USD/JPY continues
to climb. (20y ASW) Current: –3.5bp, Target: –15bp,
Stop-loss: +2bp
Losses should also be limited under a "risk off"
scenario given the likelihood that the BOJ would
increase its JGB purchases beyond the 10y sector.
20y ASW may not look especially attractive at first
glance given that it is on a rough par with its average
level since the BOJ's April 2013 launch of Quantitative
and Qualitative Monetary Easing (QQE). However, 20y
JGBs have performed quite modestly to this point in
time even as the yen has weakened, whereas one
would ordinarily expect cash bonds to outperform
swaps when the yen depreciates as unwinding of
hedges for FX- and equities-linked notes creates a need
to pay in the super-long sector(Figure1). This is perhaps
a reflection of many hedges having already been
unwound as USD/JPY rose sharply towards the end of
last year.
However, we expect USD/JPY to keep climbing into the
115–120 range, and see ample potential for 20y JGBs
to outperform swaps from this point forward given that
cash bonds are liable to see greater demand from yieldconscious investors in the event that interest rates are
driven higher by a rise in the expected inflation rate
triggered by further yen depreciation.
Figure 1: 20YASW vs. Dollar/Yen
(bp)
20
Page 8
dollar/yen (rhs)
75
15
80
10
85
5
90
0
95
-5
100
-10
105
-15
110
-20
115
10
11
12
13
14
Source: Bloomberg Finance LP., Deutsche Securities
Figure 2: Outstanding coupon-bearing JGB issuance
(excluding BOJ holdings)
825
(trillion yen)
800
Outstanding coupon-bearing JGB issuance
775
Secondary market availability
750
725
700
675
650
625
600
2009
It is possible that swap rates could fall further than JGB
yields if economic conditions deteriorate sufficiently to
drive down USD/JPY and equities. However, we would
expect the BOJ to deploy further monetary easing
measures under this "risk off" scenario, with such
action likely to center around an increase in its JGB
purchases and a lengthening of their average maturity.
Supply/demand is already extremely tight in the JGB
market as the BOJ's bond-buying operations continue
to reduce secondary market availability (Figure 2),
meaning that the central bank may see little option but
to increase its purchases from the super-long sector
(where its holdings are still comparatively low relative
to outstanding issuance). The BOJ's purchases from
the 5y–10y sector are currently equivalent to the entire
amount of new issuance, whereas its purchases
beyond the 10y sector are absorbing "only" around
30% of total supply (Figure 3). We therefore expect a
tightening of supply/demand to drive down super-long
JGB yields if the BOJ does shift further out the curve, in
which case 20y JGBs might not underperform swaps.
To summarize, we believe that going long 20y JGBs in
asset swaps should prove lucrative under a "risk on"
scenario, and that any losses should be comparatively
modest if markets do move back into "risk off" mode.
20YASW (lhs)
2010
2011
2012
2013
2014
Source: Bank of Japan, Deutsche Securities
Figure 3: Monthly JGB new issue vs. BOJ
purchase( Trillion yen)
Monthly Issue(a) BOJ purchase(b)
Ratio(b/a)
1-5y
5.4
3.0
56%
5-10y
2.4
2.4
100%
10y-
2.0
0.6
30%
Note: a is ex tap auction, b is average number during 3Q14.
Source: Bank of Japan, Ministry of Finance, Deutsche Securities
Makoto Yamashita
Tokyo,+81 3 5156 6622
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #7: Fed up Down Under - AUD 6M fwd 1Y vs. 3Y steepener
„
Pay AUD 3Y against 6M*1Y swap at +14bp,
targeting a steepening of the curve to +40bp. Stop
at 5bp.
RBA likely to remain unchanged until after the Fed
begins tightening
The RBA last adjusted the overnight rate in September
2013 when it was lowered to 2.50%. With continued
softness across much of the Australian economy our
economists do not think the RBA will raise the cash
rate until at least 2016.
At the same time the Fed will end QE in October and is
likely to begin tightening rates during 2015, in our
view. With near-term AUD cash rate expectations
relatively steady over the past few months, the AUD
front end slope has been tracking offshore markets, ie
steepening in selloffs and flattening in rallies.
Figure 1: Market pricing of end-2015 rates
4.3
Dec-15 3M rate (futures)
4.1
Cash
3.9
3.7
3.5
3.3
3.1
2.9
2.7
2.5
2.3
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: Deutsche Bank, Reuters
Figure 2: Front end and US rates are highly correlated
Little risk of material rate hikes being priced for the next
12 months
Current pricing for the cash rate through the end of
2015 is essentially neutral. We do not think the market
will price significant increases to the cash rate within
this period. We see housing as the biggest risk to the
RBA’s current neutral stance, although the Bank
recently opened discussion about possible use of
macroprudential policies to target strength in that
housing sector. If implemented, all other things being
equal, these controls will marginally reduce the
likelihood of significant tightening being priced in the
near term.
6M*1Y / 3Y is a carry-effective expression of the
steepening view
We do not think there is sufficient value in an outright
short of the Australian front end. Our preference
instead is to enter a front end steepener, because
although we think the front end is tightly anchored in
the short term, if the Fed tightens as expected the
Australian curve will also begin to price substantial rate
increases beyond mid-2016, in our view. As Figure 2 at
right shows, the front end slope has tended to be
highly correlated with US rates of late. Through Q4 we
expect the front end to become sustainably steeper.
2nd Bill futures / 3Y ACGB slope
10Y Treasury (RHS)
70
60
3.2
3
50
2.8
40
30
2.6
20
2.4
10
0
2.2
-10
-20
Jun-13
2
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Source: Deutsche Bank, Reuters
Figure 3: 6M*1Y / 3Y steepener costs 1.5bp carry / 3m
50.0
6M*1Y / 3Y slope
45.0
40.0
35.0
30.0
25.0
20.0
However, with the AUD front end so flat the cost of
carry is a challenge. To mitigate it, we recommend the
AUD 6M*1Y / 3Y swap steepener. The trade incurs
slight negative carry – about 1.5bp over three months –
but the average daily move in the slope over the past
year has been 1.2bp, so on a risk-adjusted basis we
think the carry cost is bearable. From the current entry
level of +14bp we are targeting a level of +40bp, with a
stop-loss at +5bp.
15.0
10.0
5.0
6M*1Y / 3Y slope
0.0
Oct-13
Dec-13
Feb-14
Apr-14
Jun-14
Aug-14
Oct-1
Source : Deutsche Bank
Ken Crompton
Sydney, +61 2 8258 1361
The key risk is a reinvigoration of the global rally.
Deutsche Bank AG/London
Page 9
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #8: Give me a break - Long USD 2Y fwd 2Y inflation breakevens
„
„
We like being long 2yr2yr in inflation, either
through inflation swaps or TIPS. Current 2.15,
Target: 2.30, Stop loss: 2.00. In the long end, some
off-the-run bond TIPS look cheap in breakevens
versus 10s. Current: 2bp, Target: 12bp, Stop loss: 3bp.
The 2yr2yr inflation appears attractive on a long
term history, and more attractive than some longer
term forwards, such as the 5yr5yr. In the long end,
we think there should inflation risk premium,
supporting an upward sloping breakeven curve.
Front End US Inflation Breakevens Look Attractive
We believe the recent volatility has created
opportunities in inflation markets. We like being long
2yr2yr in inflation, either through inflation swaps or
TIPS. The 2yr2yr inflation appears attractive on a long
term history, and more attractive than some longer
term forwards, such as the 5yr5yr. In inflation swaps,
the current spread around 2.13 on the 2yr2yr is well
below the average of about 2.42 on the history from
early 2012 to present. We’d target 2.30 on this trade
with a stop loss at 2.00.
The 2yr2yr in TIPS looks similarly attractive, if one uses
the 7/2016 and the 7/2018 TIPS. The 7/2016 to the
7/2018 breakeven curve has steepened since March
2014, while the forward breakeven rate has dropped
about 40bp since late July. The 2yr2yr inflation is less
correlated with energy prices than the one- or two-year
breakevens. The risk in the trade is a continuing decline
in energy prices and a weaker inflation outlook, which
would likely take the 2yr2yr to a lower level.
Opportunities in off-the-run bond TIPS
The 30-year TIPS auction later this month presents an
opportunity to put on a 10s/30s breakeven curve
steepener. We expect the Treasury to announce a $7
billion reopening of the 2/2044 TIPS on Thursday,
October 16.
Some off-the-run bonds look cheap versus 10s in
breakevens. The ten-year TIPS to the 1/2029 TIPS
breakeven spread was briefly inverted early last week.
It is very rare that this breakeven curve is inverted; it
only happened briefly in late 2012, and then the
breakeven curve steepened back. The fair value of the
spread should be positive, as there is usually a inflation
risk premium over the long run. The five-year average
of the breakeven spread is +12bp. Over the long run,
the spread is likely to gravitate towards that level. We
recommend investors look for a good entry level to be
long that breakeven curve.
Figure 1: 2yr2yr inflation swaps look cheap on a
historical basis
3.0
2yr2yr inflation swaps
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2.2
2.1
2.0
1/1/12
7/1/12
1/1/13
7/1/13
1/1/14
7/1/14
Source: Bloomberg Finance LP and Deutsche Bank
Figure 2: 2yr2yr TIPS breakevens look attractive
2.50
2.45
2yr2yr fwd TIPS BE
2.40
2.35
2.30
2.25
2.20
2.15
2.10
2.05
2.00
1/1/14
3/1/14
5/1/14
7/1/14
9/1/14
Source: Bloomberg Finance LP and Deutsche Bank
Figure 3: 10yr TIPS to 1/2029 breakeven spread was
briefly inverted last week
50
10yr TIPS to 1/2029 TIPS BE
Spread
40
30
20
10
0
-10
10/1/09
10/1/10
10/1/11
10/1/12
10/1/13
10/1/14
Source: Bloomberg Finance LP and Deutsche Bank
Alex G. Li
Page 10
New York, +1 (212) 250-5483
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #9: Bad Grade Good - Buy EUR single-B credit
„
We recommend buying EUR single B credit at
current index level spread of 610bp, we target
450bp with a stop loss at 690bp
Recent weakness in credit and specifically HY has been
most acutely felt in single-Bs, with weakness both in
relative and absolute terms.
The EUR iBoxx non-fin single-B index is at its widest
level since early October 2013 and has now widened
by around 185bps since the year’s tights back in June.
The moves in yields have been slightly less extreme,
rising just over 150bps from the year’s lows (Figure 2).
Looking at spreads relative to their own histories,
having been inside the tightest quartile in June, singleB credit spreads are now wider than their long-term
median (Figure 3). It is the only non-financial sector
where this is the case. Spreads have to tighten around
140bps to get back inside the tightest quartile.
Figure 2: iBoxx EUR Non-Financial Single-B Spreads
(bps) and Yields since 2013
800
Spreads (LHS)
8.0
700
7.5
650
7.0
600
6.5
550
6.0
500
5.5
450
5.0
400
Jan 13
4.5
May 13
Sep 13
Jan 14
May 14
Sep 14
Source: Deutsche Bank, Mark-it
Figure 3: EUR Non-Fin Credit Spreads – Percentage of
Time at Current Spreads or Tighter
To further emphasise the relative weakness the spread
ratio relative to BB credit has risen to 2x following the
recent sell-off (Figure 4) - close to the highs of the
relationship over the past decade.
60%
For the longer-term more buy-and-hold focused
investor single-Bs now offer a wider default spread
premium than all rating bands except CCCs, although
the CCC subset is a small one and can therefore be
swayed by one or two more distressed bonds.
30%
A
BBB
BB
B
50%
40%
20%
10%
In the tightest
quartile
0%
Jan
Overall there is evidence to suggest that single-Bs are
the current sweet spot for credit investors in Europe.
With aggregate spreads back above 600bps and all-in
yields close to 6.5% single-Bs may prove hard to ignore
in a still yield constrained environment where BBs
barely offer 3% yields and IG credit with the exception
of sub financials is below 2% on average.
8.5
Yields (RHS)
750
Feb Mar
Apr May Jun
Jul
Aug Sep
Oct
Source: Deutsche Bank
Figure 4: Single-B Spread Ratio vs. BBs
2.4
BB vs. B
2.2
In Figure 1 we provide the single-B rated bonds that
our HY credit analysts recommended in their recent
Top Picks note (“European HY one-stop: 2014 Top
Picks”, 29 Sep 2014).
2.0
1.8
1.6
1.4
Figure 1: HY Analysts’ Single-B Top Picks
Ticker
LECTA
Coupon
Maturity
1.2
Call
Price
Yield
3ME+550 15 May 18 05 Nov 14
OAS*
98.00
6.20
LOXAM
7.000
23 Jul 22
23 Jul 17
95.25
7.98
723
TAKKO
9.875
15 Apr 19
15 Apr 16
80.00
16.96
1,613
Source: Deutsche Bank. * - vs. Bunds
1.0
2004
2006
2008
2010
2012
2014
Source: Deutsche Bank, Mark-it
Nick Burns London, (+44) 20 754-71970
Deutsche Bank AG/London
Page 11
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #10: Turn weakness into strength - Buy weaker Spanish and Italian covered bonds
While Multi-Cedulas IMCEDI 3.5% 3.5 June 2020 (/BB+/-) provides the highest pick-up of all MultiCedulas versus Santander single Cedulas (A1/-/AA),
given that CBPP3 excludes covered bonds that do not
have at least one BBB- rating (outside Greece and
Cyprus), we recommend, for example, buying IMCEDI
4% March 2021 (A1/-/A-), rated comfortably inside the
CBPP3 rating spectrum.
Page 12
300
200
100
Jun-14
Jun-13
Dec-13
Jun-12
Dec-12
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
0
Source: Deutsche Bank
Figure 2: OBG Monte Dei Paschi July 2024 with pickup versus OBG Unicredit Jan 2024
300
MONTE 2.875 16-JUL-2024
UCGIM 3 31-JAN-2024
BTPS 4.5 01-MAR-2024
250
200
150
100
50
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Apr-14
Mar-14
Feb-14
Jan-14
Dec-13
0
Nov-13
Buy covered bonds of weaker Spanish and Italian
banks versus issues of stronger banks
While numerous details of practical execution of
CBPP3 seem uncertain, most strikingly how the ECB
will purchase retained covered bonds, we expect the
ECB to be aggressive. Consequently, we expect even
further spread convergence between lower and higher
rated covered bonds in peripheral countries.
400
Oct-13
Spreads versus sovereigns are likely to tighten further sovereign QE as key risk
We expect peripheral covered bonds to continue to
outperform sovereign bonds. However, given the
recent strong outperformance of peripheral covered
bonds versus sovereign bonds and the fact that our
economists expect sovereign QE in the next six
months, we focus on further spread convergence
between covered bonds of weaker and stronger
peripheral banks instead of spreads between peripheral
covered bonds and sovereign bonds. In case of
sovereign QE, the strong outperformance of peripheral
sovereign bonds versus covered bonds could easily
reverse.
SANTAN 4.625 04-MAY-2027
Jun-08
Buy OBG BANCAR 3.875% Oct 2018 (Ba1/-/BBB+)
versus UCGIM 1.875% Jan 2019 (A2/AA/AA-) with
a pick-up of 45bp. Take profit at 15bp with a stop
at 60bp.
AYTCED 4.75 25-MAY-2027
500
Dec-08
„
Buy OBG MONTE 2.875% July 2024 (Baa3/-/A)
versus OBG UCGIM 3% Jan 2024 (A2/-/AA-) with a
pick-up of 45bp. Take profit at a pick-up of 15bp,
with a stop at 60bp.
600
Sep-13
„
Figure 1: Multi-Cedulas AYTCED May 2027 with pickup versus single Cedulas Santan May 2027
Aug-13
Buy Multi-Cedulas AYTCED 4.75% May 2027
(A3/BB/BBB) versus single Cedulas SANTAN
4.625% May 2027 (A1/-/AA) with a pick-up of 65bp.
Take profit at a pick-up of 25bp, with a stop at
85bp.
Jun-07
„
As we expect further spread convergence between
Italian covered bonds, we recommend buying Monte
Dei Paschi and Banca Carige covered bonds versus
Unicredit covered bonds.
Dec-07
Buy Multi-Cedulas IMECDI 4% Mar 2021 (A1/-/A-)
versus single Cedulas BBVASM 3.5% Oct 2020
(A1/AA-/-/AH) with a pick-up of 85bp. Take profit at
a pick-up of 35bp, with a stop at 105bp.
Jul-13
„
Source: Deutsche Bank
Bernd Volk
Zürich, +41 44 227 3710
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Trade #11: Riding the ECB liquidity wave - Buy new issue CMBS
Short organic duration (to mitigate against MTM
effects);
„
Relatively high coupon (both to provide positive
carry and to mitigate MTM effects);
„
Floating Rate (to mitigate interest duration risk);
„
A track record of price stability.
Ideally, the instrument should also theoretically fall into
the parameters of the ECB’s ABS Purchase Programme
(Non Financial Private Sector Entities, theoretical ECB
Repo Eligibility, Investment Grade Ratings), but price
today with little or no probability of inclusion, thus
providing embedded optionality.
In our view new issue CMBS is the best fit of these
parameters (Euro bonds are theoretically acceptable at
the ECB’s Repo window), with post 2013 Issues having
exhibited the pricing stability absent in their pre 2007
brethren.
Detailed Terms
We prefer to focus on the front pay level, where
liquidity is greatest and spreads range from around
90bps for UK and Dutch CMBS, to around 125bps for
Italian CMBS. On the leverage side, we prefer to focus
on rolling 3 month Repos, where dependent on rating
and the specific bond financing terms will typically
range from 10-15% haircut, and running cost of 3M
Euribor + 70b to 80ps. Applying this against Italian
CMBS, would on the assumption of flat pricing,
generate an annualised margin over 3M Euribor of
around
463bps.
Clearly
capital
appreciations/reductions are magnified by the
application of leverage – for example a 25bp tightening
in spreads would boost returns to 1100bp. Specific
bonds we think are attractive for applying this trade
are: DECO 2014 GNDL A, MODA 2014-1 A, DECO
2014- TLPX A, WSTSTR CORP.
Deutsche Bank AG/London
A
B
C
D
E
Source: Deutsche Bank, Markit
Note: Bid Prices as per first trading day of month
Figure 2: DECO 2014 GNDL – Price History
101
Bid Px
101
100
100
A
B
C
D
E
99
Oct-14
„
Bid Px
Sep-14
Leveraged Trades against CMBS
In our view the ideal ABS instrument to apply leverage
against possesses the following characteristics:
106
106
105
105
104
104
103
103
102
102
101
101
100
100
99
Aug-14
New Issue Floating Rate CMBS
The ECB’s recent statements of intent to commence
purchases of select European ABS in Q4 should have
both first order (on the securities purchased) and
second order (the securities not purchased) effects.
While markets have inevitably risen ahead of the
implementation, we still feel there are opportunities in
the sector. In our view the most pronounced of these
are taking advantage of the second order effects, using
leverage.
Figure 1: GRF 2013-1 – Price History
Jul-14
We recommend buying new issue CMBS. Specific
bonds we think are attractive for applying this
trade are: DECO 2014 GNDL A, MODA 2014-1 A,
DECO 2014- TLPX A, WSTSTR CORP.
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
„
Source: Deutsche Bank, Markit
Note: Bid Prices as per first trading day of month
Figure 3: CMBS Repo Annualised Indicative Returns
1400
1200
bps (over
3M Euribor)
1000
800
600
400
200
0
-200
-400
-1
-0.5
0
+0.5
+1
Capital Appreciation/(reduction) scenarios (pts)
Source: Deutsche Bank
Note: Assumes bond trading at 125bps over 3M Euribor, and repo terms of 14% haircut and
running costs of 70bps over 3 month Euribor
Paul Heaton, CFA
London, +44 20 754 70119
Page 13
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Appendix
Trad e
Rec ommen d at i on
P &L
1
Short 6M5Y A TMF Payer vs long 2x A TMF +20bp
-7.5bp
2
Long BTP 4.5% Mar-24 vs Bund 1.5% May - 24
+13bp
Not es
3
Pay belly of JPY 5Y*2Y /5Y*5Y/10Y*10Y
+3bp
4
Long 10yr GBP vs EUR
-17bp
Stopped out
Short Dec 15 Short Sterling
+20bp
Reached target
5
Vanilla 3Y fwd 10s30s Steepener
+15bp
Buy 3Y expiry 10s30s CMS spread cap ratio 1x2 35bp/65 bp
+0.5bp
6
10s30s TIPS Steepener
+15bp
7
Buy 10yr HICP swap
Long 5yr EUR real rate vs short 5Y USD real rates
-7bp
Stopped out
+19bp
Long BTPei16 vs nominal BTP - tightening on A SW
+9bp
8
Buy 5yr Canada paper swapped into EURIBOR
+14bp
9
Long 30yr 4% MBS paa-through,
-0.3%
Total return
Inverse interest only MBS
2.9%
Total return
Buy A A A private student loan A BS
0.1%
Total return
10
Long DA LRA 4-X C
15.0%
Total return
11
Buy single cov bonds of weaker Italian banks vs Multi Cedulas
+11bp
Buy single Cedulas of weaker Spanish banks vs Multi-Cedulas trading with a pick up.
1.2%
Total return
Buy HA A FRN March 15
-2.2%
Total return
Buy HA A 4.25% Oct 2016
-15.8%
Total return
12
Overweight US HY BBs vs BBBs with a 4-6yr option adjusted duration constraint on both sides
-33bp
13
Buy US IG A rated financials vs non financials with a 5-6yr option adjusted duration constraint
on both sides
+4bp
14
Sell $100mn 3M5Y straddles at 29bp vs buy $100mn 3M5Y 22bp OTM payers at 7bp
+16bp
Sell $100mn 6m5Y 40bp OTM payers vs buy $463 6m1Y A TMF payers at zero cost
+3bp
Buy $100mn 3m5Y A TMF receivers, sell $100mn 3m5Y A TMS reecievers, sell $100mn 3m5y
17.5bp OTM payers at zero net cost
0bp
Hi t rat i o
72%
A v erag e P &L f or t rad es wi t h p erf orman c e measu red i n b p
4.3b p
A v erag e P &L f or t rad es wi t h p erf orman c e measu red i n %
0.1%
Trade performance of Top trades for the summer (12 June to 3 October)
Page 14
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Appendix 1
Important Disclosures
Additional information available upon request
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this
research, please see the most recently published company report or visit our global disclosure look-up page on our
website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Francis Yared
Deutsche Bank AG/London
Page 15
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the
meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively.
Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and
its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is
indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where
at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the
preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for
its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483.
EU
countries:
Disclosures
relating
to
our
obligations
under
MiFiD
can
be
found
at
http://www.globalmarkets.db.com/riskdisclosures.
Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc.
Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau
(Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures
Association of Japan, Japan Investment Advisers Association. This report is not meant to solicit the purchase of specific
financial instruments or related services. We may charge commissions and fees for certain categories of investment
advice, products and services. Recommended investment strategies, products and services carry the risk of losses to
principal and other losses as a result of changes in market and/or economic trends, and/or fluctuations in market value.
Before deciding on the purchase of financial products and/or services, customers should carefully read the relevant
disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this
report are not registered credit rating agencies in Japan unless "Japan" or "Nippon" is specifically designated in the
name of the entity.
Malaysia: Deutsche Bank AG and/or its affiliate(s) may maintain positions in the securities referred to herein and may
from time to time offer those securities for purchase or may have an interest to purchase such securities. Deutsche Bank
may engage in transactions in a manner inconsistent with the views discussed herein.
Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre
Regulatory Authority. Deutsche Bank AG - QFC Branch may only undertake the financial services activities that fall
within the scope of its existing QFCRA license. Principal place of business in the QFC: Qatar Financial Centre, Tower,
West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related
financial products or services are only available to Business Customers, as defined by the Qatar Financial Centre
Regulatory Authority.
Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute,
any appraisal or evaluation activity requiring a license in the Russian Federation.
Kingdom of Saudi Arabia: Deutsche Securities Saudi Arabia LLC Company, (registered no. 07073-37) is regulated by the
Capital Market Authority. Deutsche Securities Saudi Arabia may only undertake the financial services activities that fall
within the scope of its existing CMA license. Principal place of business in Saudi Arabia: King Fahad Road, Al Olaya
District, P.O. Box 301809, Faisaliah Tower - 17th Floor, 11372 Riyadh, Saudi Arabia.
United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated
by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services
activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai
International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been
distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as
defined by the Dubai Financial Services Authority.
Page 16
Deutsche Bank AG/London
9 October 2014
Special Report: Bipolar trading for a bipolar world - Top Fixed Income Trades for the Autumn
Risks to Fixed Income Positions
Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise
to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash
flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a
loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the
loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse
macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation
(including changes in assets holding limits for different types of investors), changes in tax policies, currency
convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and
settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed
income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to
FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the
index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended
to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon
rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is
also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be
received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options
in addition to the risks related to rates movements.
Deutsche Bank AG/London
Page 17
David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Guy Ashton
Global Chief Operating Officer
Research
Michael Spencer
Regional Head
Asia Pacific Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany
Richard Smith and Steve Pollard
Co-Global Heads
Equity Research
Andreas Neubauer
Regional Head
Equity Research, Germany
Steve Pollard
Regional Head
Americas Research
International Locations
Deutsche Bank AG
Deutsche Bank Place
Level 16
Corner of Hunter & Phillip Streets
Sydney, NSW 2000
Australia
Tel: (61) 2 8258 1234
Deutsche Bank AG
Große Gallusstraße 10-14
60272 Frankfurt am Main
Germany
Tel: (49) 69 910 00
Deutsche Bank AG London
1 Great Winchester Street
London EC2N 2EQ
United Kingdom
Tel: (44) 20 7545 8000
Deutsche Bank Securities Inc.
60 Wall Street
New York, NY 10005
United States of America
Tel: (1) 212 250 2500
Deutsche Bank AG
Filiale Hongkong
International Commerce Centre,
1 Austin Road West,Kowloon,
Hong Kong
Tel: (852) 2203 8888
Deutsche Securities Inc.
2-11-1 Nagatacho
Sanno Park Tower
Chiyoda-ku, Tokyo 100-6171
Japan
Tel: (81) 3 5156 6770
Global Disclaimer
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public
sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including
strategists and sales staff, may take a view that is inconsistent with that taken in this research report.
Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change
without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or
subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an
offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement. The financial instruments discussed in this
report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial
instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche
Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis. Prices are current as of the end of the
previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Derivative transactions involve numerous risks including, among others, market, counterparty default and illiquidity risk. The appropriateness or otherwise of these products for use by investors is dependent on the
investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities and as such investors should take expert legal and financial advice before
entering into any transaction similar to or inspired by the contents of this publication. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the
"Characteristics and Risks of Standardized Options," at http://www.theocc.com/components/docs/riskstoc.pdf . If you are unable to access the website please contact Deutsche Bank AG at +1 (212) 250-7994, for a
copy of this important document.
The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading losses may be incurred that are greater than
the amount of funds initially deposited.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche
Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this
report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Conduct Authority for the conduct of investment business in the UK
and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG,
Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), and recipients in Singapore of this report are to contact Deutsche
Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a
person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia
Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this
report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and
consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa:
1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any
person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.
Copyright © 2014 Deutsche Bank AG
GRCM2014PROD032968