EQUITIES: Large Commerzbank Put Option trade

ING see scope for a continued steepening of the EUR 20s30s curve, helped by Dutch pension fund demand. In addition to demand for fixed receiver swaps (particularly 20y tenors) stemming from the transition from a defined benefits to defined contribution system in 2026, the recent sell-off in global equities and lowering in global rates has placed pressure on pension fund’s funding ratios.

• “The sell-off in equities lowers the funds’ assets, whilst lower interest rates increase liabilities”.
• “Our modelling suggests that the impact so far on the average funding ratio is around -4%, which would bring the ratio down to 114%”
• “Several large funds, including the largest ABP (€500bn+ AUM), have a lower funding ratio than the average, and thus risk seeing their funding ratio fall too close to 100% for comfort”.
• “The added headwinds and volatility therefore incentivise funds to hedge risk, either through fixed receiver swaps, equity puts or swaptions”.
• “The period leading to the transition dates could see increased demand for fixed receiver swaps, particularly in the 20y space. The 30y tenor is less attractive given that longer-dated hedges will become obsolete after transitioning to defined contributions. As such, the steepening of the 20s30s curve could run longer, helped by Dutch pension fund demand.”  

• There has been a lot of focus this morning on the Guardian article in which ex-MPC members Bean and Blanchflower argued for large imminent cuts. Bean has argued for a 50bp cut in May and Blanchflower for an intermeeting cut.
• It is important to put the views of these former policymakers into context, however, with both having a dovish leaning (albeit Blanchflower much more than Bean): Bean dovishly dissented in 5/166 MPC meetings (remember that meetings were monthly when he was on the MPC). Blanchflower dissented in half of his 36 meetings (including favouring a 50bp cut in September 2008 when the majority of the MPC voted to keep Bank Rate on hold).
• So in lots of ways, it is to be expected that two former doves remain dovish.
• Having said that, Bean does make some good points. He emphasises how much weight the MPC put on the Agents' feedback during the financial crisis - and we know that the current MPC also pays a lot of attention to the Agents now (particularly with regard to pay expectations). If the Agents' feedback is more concerning than things like the PMIs suggest, then there is a good chance the MPC acts more aggressively than the market expects.
• However, there are still inflationary challenges for the MPC to contend with: the potential passthrough from employer NICs to prices, higher wages than are consistent with a 2% inflation target, food prices starting to pick up and to move even higher later this year with a new packaging tax. For now it looks less likely the UK will introduce extra tariffs which would be inflationary (but can't be fully ruled out).
• However, with confidence suffering we think a cut does look likely in May at least. And there is likely to be at least Dhingra voting for 50bp. We will be watching closely any further MPC comments to see if there is any change in view elsewhere. Lombardelli is on a panel at 17:00BST today while Breeden is at an MNI Connect webinar Thursday (register here).
• What about past May? The next 5 days are hard to predict at the moment, let alone months into the future. We think the BOE will try and keep communications about future actions very restrained.