20180720-法国巴黎银行-Brazil_CDS__The_rally_isn_t_over_yet__what_to_do__8页_391kb

EM/LATAM Strategy Summary: Brazil CDS - The Rally Isn't Over Yet

Core Content

This document outlines the strategy and analysis for trading Brazil 5-year Credit Default Swaps (CDS) by Banco BNP Paribas Brasil S.A. It details the rationale behind a short CDS strategy, the current market situation, and the updated model that informs the strategy's evolution. The report is authored by Gabriel Gersztein, Samuel Castro, and Luca Maia, who are strategists within the BNP Paribas group.

Main Viewpoints

• Strategy Overview: The report introduces a short Brazil 5y CDS strategy, initiated on 19 June 2018, based on a new CDS trading framework.
• Initial Position: Brazil 5y CDS was initially priced 50-60 basis points (bp) above fair value, prompting the opening of a short position at 283bp with a target of 230bp.
• Model Update: A recent model update indicates that the CDS has further room to decline, with the hypothetical fair value now at 190bp.
• Strategy Adjustment: The target has been extended to 200bp, while the original allocation has been halved from USD 10k DV01 to USD 5k DV01 (equivalent to USD 12.5 million).
• Carry Benefit: The strategy benefits from a carry of +4.6bp per month, which supports the continuation of the trade.

Key Information

• Market and Model Bands: Charts 1 and 2 illustrate the difference between market prices and model-based fair value estimates.
• Fair Value Estimate: The updated model suggests a fair value of 190bp for Brazil 5y CDS.
• Strategy Implications: The extension of the target reflects confidence in the ongoing undervaluation of Brazil CDS relative to the model's fair value.
• Risk and Disclosure: The document contains extensive legal and regulatory disclosures, emphasizing the non-independent nature of the research and the potential for conflicts of interest. It also outlines the risks associated with CDS trading, including market, counterparty, and liquidity risks.

Legal and Regulatory Information

• Non-Independent Research: This document is considered non-independent research under MiFID II and is intended for professional clients and eligible counterparties.
• Conflicts of Interest: BNPP may have financial interests in the issuers or entities discussed and may engage in transactions that could conflict with the views expressed in the report.
• Disclaimer: The document does not constitute an offer to sell or issue securities, nor is it a solicitation of an offer to buy. It is for informational purposes only and does not guarantee future performance.
• Confidentiality: The information provided is confidential and may not be distributed without prior written consent.
• Jurisdictional Restrictions: The document contains important disclosures for the United States, United Kingdom, France, Germany, Belgium, Ireland, Italy, Netherlands, Portugal, Spain, and Switzerland, highlighting the specific regulatory requirements and limitations in each jurisdiction.

Summary of Strategy

• Objective: To profit from the continued undervaluation of Brazil 5y CDS.
• Current Position: The strategy has reached its original target of 230bp.
• New Target: Extended to 200bp based on updated model results.
• New Allocation: Reduced to USD 5k DV01 (USD 12.5 million) from USD 10k DV01.
• Carry: The strategy benefits from a monthly carry of +4.6bp.

Conclusion

The document concludes that the Brazil 5y CDS rally is not over, and the updated model supports further downside potential. The strategy has been adjusted to reflect this new outlook, with a reduced allocation and extended target. The report underscores the importance of understanding the risks associated with CDS trading and highlights the regulatory and legal considerations relevant to the jurisdictions where BNPP operates.