Trade: Short SPGB Jan 2023 vs Long IRISH Mar 2023
Last: 21 bp
Carry/roll in 1y: -3.7 bp
Post 2011 the SPGB - IRISH OTR 5y spread traded between 20bp and 60bp, and we're now at 20bp. Spread wideners could be a way to fade the post-ratings upgrade rally in SPGB's.
Catalonia is an old story, however any meaningful risk premium I think should still be weighted towards Spain rather than Ireland. Ireland's comparatively better fiscal position of +ve primary balances, and a better maturity profile of debt relative to EU, should keep the spread floored at the current range lows of 20bp. NTMA supply is also likely to be capped due to early repayments of IMF loans, and switching of near-term bonds which reduced state refinancing needs to 30 billion euros from 60 billion for the next 3 years, likely reducing issuance related pressure on IRISH.
In a broader peripheral selloff, could also reasonably expect SPGB's to have a higher beta than IRISH, hence quite difficult to see the spread meaningfully compress much further.
1y Carry+roll in bp (IRISH in yellow, SPGB in brown) - red circle marks OTR 5y
Trade: KRW 1y fwd 1s5s Steepener:
Rolls to: 33bp (+23.4bp) ; 5y roll/range of 0.50
KRW steepeners to fade the front end are currently attractive, given that risk premium for hikes should be more balanced further out the curve than just the immediate 1y1y point. Their first hike in November was largely dovish, and given that language in the BoK's policy outlook for 2018 remains 'accommodative', it is likely to see the hikes as gradual.
With headline inflation cooling from overshooting at 2.5% in November to a current 1.5%, and expected to be on the upper side of 1% for this year by the BoK, it is likely to see a pullback in immediate rate hike pricing. This view is also supported given that South Korean industrial figures and PMI rolling over recently, and that the KRW has materially appreciated over 10% to the USD and 5% to the Yuan in 2017.
Although the curve has already steepened from its lows of 4-5bps, it's still at attractive enough levels to build steepeners. The one concern with steepeners with using something like a 5y point is that the KRW does have some beta to the global cycle for obvious reasons and given all the USD flattening, it is something to keep in mind. However, given that in recent history the curve has only inverted in recession, it seems reasonable to expect it to not move lower than 4-5 bp area for the near term.