巴黎银行-中国-宏观策略-中国：关闭NCD与CCS交易-20190614-7页_551kb

Summary of Document: China - Close NCD CCS Trade

Core Content

This document outlines a decision by BNP Paribas to close a previously opened trade idea involving the purchase of 1-year onshore Negotiable Certificates of Deposit (NCDs) via USDCNH CCS. The trade was initiated on 28 December 2018 and is now being closed due to a narrowing of the yield spread between the 1-year NCD and the 1-year USDCNH CCS, which has reduced the positive carry associated with the trade.

Key Points

• Trade Idea Overview:

  • The trade involved buying 1-year onshore NCDs using USDCNH CCS.
  • The trade was initiated on 28 December 2018.
  • The trade is now being closed, resulting in a 55 basis point (bp) profit.

• Current Market Conditions:

  • The yield spread between 6-month NCDs and 6-month USDCNH CCS has narrowed to 5 bp, indicating a reduced carry opportunity.
  • The RMB FX rate has been under bearish sentiment, keeping USDCNH CCS at a stable level.
  • The front end (shorter tenors) of the NCD yield curve is now flat compared to longer tenors.

• Reason for Closing the Trade:

  • The recent takeover of Baoshang Bank by the PBoC has led to financial deleveraging among smaller financial institutions.
  • This has resulted in a slightly tighter interbank money market and a recovery in NCD yields.
  • The carry trade is no longer beneficial, and the trade is being closed to secure the profit.

• Yield Comparison:

  • At the time of opening the trade (28 December 2018), the 1-year NCD yield was 3.40%, while the 1-year USDCNH CCS was at 2.80%, creating a 60 bp spread.
  • Currently, the 6-month NCD yield is 2.95%, and the 6-month USDCNH CCS is at 2.90%, resulting in a 5 bp spread.

Key Information

• Profit Realization:

  • The trade idea is being closed to realize a 55 bp profit.

• Market Analysis:

  • The carry trade between NCDs and USDCNH CCS has become less attractive.
  • The narrowing of the yield spread suggests a convergence in the relative value of the two instruments.

• Document Disclaimer:

  • The document is a marketing communication and not independent research.
  • It is intended for professional clients and eligible counterparties.
  • It does not constitute investment advice and should not be relied upon as an authoritative source.

• Legal and Regulatory Information:

  • The document contains important disclosures related to financial instruments, including options, ETFs, and convertible securities.
  • It is subject to various legal requirements and may contain conflicts of interest due to BNPP's involvement in transactions with the entities mentioned.
  • The document is confidential and not intended for general distribution.
  • It is not a prospectus or public offering and does not constitute an offer to sell or purchase any financial instruments.

• Jurisdictional Information:

  • The document is subject to specific regulations in the UK, Canada, and France.
  • In the UK, it is communicated by BNPP London Branch and is subject to limited regulation.
  • In Canada, it is intended for "Permitted Clients" and "Accredited Investors" and is not investment advice.
  • In France, the report is produced by BNPP SA and BNPP Arbitrage, both of which are authorized and supervised by the ECB and ACPR.

Conclusion

The decision to close the NCD CCS carry trade reflects the changing market dynamics, particularly the narrowing of yield spreads and the impact of regulatory actions on the interbank market. The trade was profitable and is being closed to capture the gains, highlighting the importance of monitoring yield differentials and market conditions in currency and fixed income strategies.