EFTA01207563.pdf

From: "Jeffrey E." <[email protected]> To: Daniel Sabba Cc: Paul Morris , Vahe Stepanian , Ariane Dwyer , Richard Kahn Subject: Re: Higher rates in Europe - timely [C] Date: Thu, 30 Apr 2015 12:51:56 +0000 Inline-Images: image002.png; image003jpg; image00 1 jpg what are the interest rates today or do i need to look at the chart? On Thu, Apr 30, 2015 at 8:31 AM, Daniel Sabba > wrote: Classification: Confidential I wanted to share some thoughts on the risk reward for European fixed income. At yesterday's close, 1 0y EUR swaps and l0y bunds were up 0.098% and 0.122% respectively. For a holder of l0y sovereign German bond (DBR 0 12/ 02/15/25), yesterday's MTM movement represented the yield its owner would have earned for about 7 years. The equivalent movement for the 30y German bond (DBR 2 '/ 08/15/46) represents about 6 years of yield. This begs the question of whether market participants who own European government debt will rethink the risk reward of that investment. Is such an asset worth owning once one realizes such a daily blip in interest rates has the potential to wipe out multiple years of yield? The options below allow investors to position for a lift-off in European swap rates with limited downside of premium paid. From: Daniel Sabba Sent: Wednesday, April 29, 2015 11:57 AM To: 'Jeffrey E.' Cc: Paul Morris; Vahe Stepanlan; Mane Dwyer; 'Richard Kahn' Subject: Higher rates in Europe - timely [C] Importance: High Classification: Confidential This is timely given this morning's moves... EUR swap rates are up dramatically and markets are fluid - the pricing below is as of last night's close. Trade Rationale: • Yields in the Eurozone have fallen since the start of 2014, and the commencement of the ECB's 1.1 trillion EUR quantitative easing program in March has fueled the dedine to a greater degree than anticipated EFTA01207563 • This drop is highlighted in Chart 1, which shows the historical performance of the 10yr and 30 yr EUR Swap rate and 10y and 30y German bund yields. The chart also shows the 5 and 15 year average yield for the 30y EUR Swap rate • Investors are now questioning if these unprecedented lows are sustainable and how they can position themselves for a rise in European rates • To articulate this view, investors can purchase CMS caps on the 30yr EUR swap rate that provides a linear payout on the 30yr EUR Swap rate if it rises above the strike. In this trade, even a small retracement to the historical norm provides a meaningful payout • A retracement to 5y historical averages would yield a payout of —6x on 1y 1% strike caps, while a retracement to 15y historical average would yield a payout of —12x. • In the below table we have included indicative pricing (as of 4/28 close) for 1 and 2yr expiries, and 1.00%, 1.25% and 1.50% strikes. In addition, for the 1y CMS cap struck at 1.00%. we have included a terminal payout diagram and a chart showing the strike and breakeven level on the 30yr EUR Swap 1 year chart (Chart 2) Chart 1 (time series of European rates) 6.030-• • 10yr Bund Yields (R1) ■ 30yr Bund Yields (11) 0-6.00:. .6.0000 • 10yr EUR Swaps (R2) ■ 30yr EUR Swaps (1.2) 5.000. 0- 5.0000 . 5.0000. 4.000-4 ..- 4.0000 4.0000 - 15yr Average 30yr EU Swaps 3.000-4 •-3.0D00 3.0000. 2.000. Syr Average 30yr EUR Swaps f •-2.0000 2.0000. .., 4 1.000. 1. 1.0000 1.0DOD -4 0.000. •- 0.00:0 '00 I '01 I '02 I '03 I '04 I '05 I '06 I '07 I '08 09 '10 '11 '12 13 '14 '15 Indicative Transaction Terms: Client buys: CMS Cap on 30y EUR CMS rate, Single Look at Expiry Terminal Payout: Notional • max (Terminal CMS rate — strike, 0) Currency EUR EUR EUR EUR EUR EUR Strike 1.00% 1.00% 1.25% 1.25% 1.50% 1.50% EFTA01207564  Expiry 1y 2y 1y 2y 1y 2y Tail 30y 30y 30y 30y 30y 30y ATMF 0.94% 1.07% 0.94% 1.07% 0.94% 1.07% Offer (mid) bps 26 (23) 46 (40) 16 (14) 34 (30) 10 (8) 25 (21) Break Even 1.26% 1.46% 1.41% 1.59% 1.60% 1.75% Terminal Payout Chart for 1% strike CMS Caps on 30y 1.00% 2 0.80% 0 O 0.6o% 0.40% 0.00% O•Seeds* O• S ^1.•o,<5 4 e et" v Terminal Reference Swap Rate (CMS) Chart 2 (EUR 30y swap rates and breakeven for the 1y CMS cap struck a 1.00%,) Breakeven Please note these transaction terms are indicative. Regards, EFTA01207565  Daniel Daniel Sabba Key Client Partners Deutsche Bank Securities Inc. Email This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. please note The information contained in this communication is confidential, may be attorney-client privileged, may constitute inside information, and is intended only for the use of the addressee. It is the property of JEE Unauthorized use, disclosure or copying of this communication or any part thereof is strictly prohibited and may be unlawful. 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