EFTA01472954.pdf

Subject: Re: Higher rates in Europe - timely [C] From: Paul Morris a> Date: Thu, 30 Apr 2015 08:48:55 -0400 To: Daniel Sabba Classification: Confidential Thanks From: Daniel Sabba Sent: Thursday, April 30, 2015 05:31 AM To: Daniel Sabba; jeffrey E. <[email protected]> Cc: Paul Morris; Vahe Stepanian; Ariane Dwyer; Richard Kahn •c > Subject: RE: Higher rates in Europe - timely [C] Classification: Confidential I wanted to share some thoughts on the risk reward for European fixed income. At yesterday's close, lOy EUR swaps and lOy bunds were up 0.098% and 0.122% respectively. For a holder of lOy sovereign German bond (DBR 0 / 1 2 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 11 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 Stepanian; Ariane Dwyer; 'Richard Kahn' Subject: Higher rates in Europe - timely [C] Importance: High EFTA01472954 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 decline to a greater degree than anticipated This drop is highlighted in Chart 1, which shows the historical performance of the 10yr and 30 yr EUR Swap rate and lOy 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 ly 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 ly 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) fcid:[email protected] Indicative Transaction Terms: Client buys: CMS Cap on 30y EUR CMS rate, Single Look at EFTA01472955 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% Expiry ly 2y ly 2y ly 2y Tail EFTA01472956  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% EFTA01472957  1.59% 1.60% 1.75% Terminal Payout Chart for 1% strike CMS Caps on 30y {cid:[email protected]} Chart 2 (EUR 30y swap rates and breakeven for the ly CMS cap struck at 1.00%,) {cid:[email protected]} Please note these transaction terms are indicative. Regards, Daniel Daniel Sabba Key Client Partners Deutsche Bank Securities Inc. Tel. + Mobile Email EFTA01472958