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BTPS: VIEW: HSBC think "the regime of bull steepening may be at an end: the vol.
of the entire curve has fallen, particularly at the shorter maturities. This
implies that the 2-10-year slope should start to bull flatten if vol. continues
to fall. Alternatively, if there is a severe enough shock to disrupt this
normalisation trend, the curve should bear flatten as the short end becomes more
vol. This suggests that a 2-10-year flattener could perform in a range of
scenarios. We think the 10-year has lagged the move, and there is room for it to
catch up. The structural factors of PEPP & the moves towards fiscal support on
an EU-wide level, should all tend to compress spreads. Economic recovery could
act as a tailwind, but experience has shown that the effect of ECB stimulus
tends to outweigh even severe economic downturns. The extreme -ve carry of this
flattener made it unpalatable to most investors before now, even as the curve
re-steepened. The flattener trade still carries negatively, but with a more
manageable 6bp/3m it should easily be overshadowed by the potential for falling
yield at the 10-year point." They look to enter a short BTPS 1% 07/22-long BTPS
0.95% 8/30 spread at 126bp today, targeting 106bp with a stop at 136bp.