20181128-法国巴黎银行-EM_sovereigns__Brazil__Returning_to_selling_protection_strategy_8页_946kb

Brazil CDS Strategy Summary - 28 November 2018

Core Content

This document outlines a trade idea for the Brazilian sovereign credit default swap (CDS) market, suggesting a "sell protection" strategy based on the current market conditions and a proprietary CDS model. The strategy is proposed by BNP Paribas Emerging Markets team, with the key focus on the valuation of 5-year CDS contracts.

Key Messages

• Current Position: The team has been neutral on credit since 29 October, and previously closed a short 5y CDS strategy at 198bp (entry point: 283bp).
• New Strategy: After a recent adjustment to 220bp, the team believes it is time to re-enter the position.
• Model Fair Value: The CDS model suggests a hypothetical fair value of approximately 165bp.
• Overbought Status: The 5y CDS is currently overbought by 50bp compared to the model's fair value.
• Strategy Details:
  • Action: Sell Brazil 5y CDS at 219bp
  • Allocation: USD15,000 DV01 (~USD45 million)
  • Initial Target: 180bp (subject to change based on market dynamics)
  • Stop Loss: 240bp
  • Carry: +5bp per month

CDS Model for Brazil

The CDS model is based on the following equation:

$$
CDS5y_t = \theta + \lambda \text{debt dynamics indicator}_t + \psi_i US \text{real interest rates}_t + \mu_i BAA \text{Corp}_t + \varepsilon_t
$$

Variables Used:

• Domestic Debt Dynamics Indicator: Measures the difference between the current level of real interest rates (forward-looking, 2-year) and the theoretical level that keeps $\Delta b$ stable.
• External Structural Factors: US real interest rates.
• External Credit Factors: Spread between BAA-rated US corporates and US Treasury (UST) yields.

Model Performance:

• Coefficients are statistically significant at 1%.
• The model has an R² of 0.81, indicating a strong explanatory power.
• The model suggests that the fair value of 5y CDS is around 165bp, while the current market level is 220bp, indicating an overbought condition.

Risk Consideration

• Primary Risk: Further deterioration of US high yield (HY) credit health, which could impact Brazil's sovereign risk profile.
• Link to US HY: The team references a separate report on US Corporate HY, highlighting potential linkages and risks.

Legal and Regulatory Notice

• This document is a marketing communication and not independent investment research.
• It is intended for Relevant Persons as defined by MiFID II and other applicable regulations.
• The document may contain Research under MiFID II unbundling rules, which is only available to certain firms.
• No Investment Advice: BNPP does not provide investment, financial, legal, or tax advice.
• Disclaimer: All estimates and opinions are based on internal models and may be subject to change. The document is not a prospectus or public offering.
• Confidentiality: The information is provided on a strictly confidential basis and may not be shared without prior consent.
• Conflicts of Interest: BNPP may have financial interests in the issuers or market participants mentioned and may engage in transactions that conflict with the views expressed in this document.

Additional Disclosures

• Options and ETFs: The document includes important disclosures regarding options and ETFs, noting their risks and the potential for conflicts of interest.
• U.S. Disclosures: Certain securities may not be registered under U.S. law and are only available to Qualified Institutional Buyers (QIBs) or non-U.S. persons.
• Regional Supervision: The document provides details on the regulatory bodies overseeing the distribution of this report in various jurisdictions, including the UK, France, Germany, Belgium, Ireland, Italy, Netherlands, Portugal, Spain, and Switzerland.

Conclusion

The team at BNP Paribas recommends re-entering a short position on Brazil 5y CDS at 219bp, based on the belief that the current market price is overbought relative to the model's fair value. The strategy is subject to market dynamics and carries a stop loss at 240bp. The analysis highlights the importance of debt dynamics and U.S. interest rates in determining the fair value of Brazil's sovereign CDS. Investors are advised to exercise caution and seek independent advice before making any investment decisions.