EFTA01447151.pdf

While It's hard to get excited about lOy BTPs yielding 3.16% (164bp over 10Y German (kinds) I'd still have 5-10mm lOy BTPs in my portfolio both for the duration and spread compression potential. I prefer lOy over 5y because the recent nearly parallel spread compression has left 5s10s steep relative to 0-5s.. 3 reasons i like this trade: i) macro investors view ECB QE as a second bite at the cherry. Everyone I talk to wants European risk assets having seen QE in the US. ii) ECB QE is probably still 3-6mths away which will keep credit bid. This will be a buy the rumour sell the fact trade iii) Credit has been bulletproof during the recent risk selloff because a) ECB QE expectations, b) G3 rate hikes are being pushed into the future while cash has nowhere else to go. This price action is telling - as and when equities recover i think credit continues to tighten Yields of 10Y Italy, lOy Germany and the Yield spread (Embedded image moved to file: pic08880.gif) 2) Tactically position for higher EURUSD - 2 week view (now) BUY EUR5Omm 2week expiry 1.40 strike European Style EURUSD Calls (4 6bp (EUR30,000) This is a low cost contrarian short term tactical call. Most investors myself included are bullish USD in the medium term (see trade 3) but in the very short term I see EURUSD higher because: i) Despite ECB preparing the markets for QE, the price action of EURUSD (broadly unchanged) has been quite bullish compared to what one would expect ii) Speculators don't appear long EURUSD to us. Majority are short or flat. iii) implied volatility is 5.25% (offer for 2week options) which is very very low historically. So this is a penny option, highly convex, pain trade bet against other speculators betting on QE If my view is wrong 6bp is lost. If I'm right I'd plan to exit in a week making 4-6x Scenario Analysis - Premium in bp of EUR notional (Embedded image moved to file: pic15982.gif)« 4bp is mid mkt, offer is 6bp 3) Position for a Stronger Dollar - lyear view (now or soon) Buy ly expiry European style digital binary option on EURUSD struck 5% below spot @ 21% of payout (which i think is too cheap) Current strike (spot - 5%) would be 1.3120 At expiry if EURUSD has fallen by more than 5% from current levels the option payout is EuRlmm. upfront premium is EUR210k. The option is liquid and can be unwound at any time. i) Yellen has done a poor job of communicating the Fed's thinking but its increasingly clear the Fed will brake later than usual ii) Betting on higher US interest rates in the rates market isn't cost effective because the forward curve is already pricing in higher rates iii) The Dollar hasn't appreciated yet because short rates in the us haven't risen meaningfully iv) THE KEY POINT - FX volatility is very low in currency pairs like EURUSD where central bank policy on each side is increasingly diverging. The low vol makes this bet inexpensive to put on. v) Because FX vol is so low betting now or soon with a one year time horizon costs very little. id rather be early than late here vi) i prefer by expiry because this trade could take 6-12mths to play out lY EURUSD VOL: Low - but then again most most vols are What I like about EURUSD is that central bank policy on each side is diverging (Embedded image moved to file: pic19237.gif) This Table shows mid-market premiums (in % of notional) as spot and time change. (Embedded image moved to file: pic00991.gif) 19.5 is mid (offer is 21) 4) Scale into L4mm Nationwide (UK Building Society) 6.875% perpetual which yields 6.4% in GBP and is likely to be called in Syears European Bank AT1 HyBrid Bonds (aka CoCo's) have rallied significantly. We were unable to get the BBVA issue at the right levels. CONFIDENTIAL — PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0101692 CONFIDENTIAL SDNY_GM_00247876 EFTA01447151