HALISTER1: TLTRO-II and EUR Rates Volatility Relative Value Trade: SG

TLTRO-II and EUR Rates Volatility Relative Value Trade: SG

(Bloomberg) -- Banks may be tempted to sell the 4yNC2 Bermudian call option embedded in the TLTRO II, which should further depreciate the 2y2y, 3y1y, 3y2y, 4y1y areas of the EUR swaption grid, Societe Generale strategist Adam Kurpiel writes in client note.
  • Sell the 2y2y/4y1y area of EUR vol grid vs cheaper 5y tails
  • Buy EUR 3y5y receivers, sell 3y2y receivers; ATMF, PV01- weighted
  • Risks: bull-steepening of the 2-5y curve, spot or forward
  • Net of the TLTRO I outstanding (EU426b, which can be rolled into TLTRO II), European banks can in theory borrow up to ~EU1,200b via TLTRO II operations
  • Expect an almost total rollover of TLTRO I and an additional take-up of around EU150b in 2016
  • All TLTRO II operations have a maturity of four years, with an option to repay loans at a quarterly frequency after two years
  • Expected or effective flows should further depreciate the 2y2y, 3y1y, 3y2y, 4y1y areas of the EUR swaption grid – on ATMF and lower strikes
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Adam Kurpiel (Societe Generale SA)

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