COMMENTS

PRICE ACTION THIS AM
Despite markets trading lower out of the gates on rumors of Bin Laden's
capture, customer flows we've seen have been skewed to the buyside. We've
had buying of euribor, selling of puts on dec bund futures, and buying of
bunds/bobls/schatz on an outright basis. This just feels like a case of the
market getting way too bullish way too soon. As for flows, the vast majority
of our accounts seem to have taken most of their chips off the table a few
days ago though there's obviously some large positions still remaining.
While we don't advocate going long just yet as we believe there's
potentially another day or two of weakness here, we certainly think it's
time to begin to cover shorts and at least contemplate going long again. We
don't give much weight to the Bin Laden rumor, fyi. Additionally, I heard
two interesting pieces of anecdotal evidence recently - two very prominent
business schools (one in the US and one in Europe who usually place at least
95% of their graduates by this time of the year have placed just 50% and 5%
respectively of their graduating classes. 

EUR SWAPS
Yet another day of very solid receiving in 10yr swaps. As we mentioned
previously, we thought the Tresor would re-enter the market if we weakened
again. Well, we did and they did. We estimate roughly EUR2bln 10yrs traded
as 10yr swap spreads closed another 1bp tighter on the day. Given where
we've opened today, we expect to see more receiving pressure yet again.
Additionally, 2/5/10 looks quite convex here at -11bps and we expect to see
dealers taking this position off later today - we've already seen one prop
account take some off today. On the new issuance front, while the EUR5bln 5y
EIB deal will be priced today, it's already been swapped and our best guess
is that the continental bank that took down the bobl 138 yday did so against
the receiving they've done in the run up to this deal. So today, we expect
them to pay in 5yrs vs bobls to get net flat the sector. We also get the
EUR750mm deal for Deutsche Bahn later today and while it was supposed to be
swapped yday, the rumor is that it was postponed and will likely be swapped
in the next day and a half. 

EUR VOL
Vol's been marked down pretty dramatically over the past two days as we
closed virtually the entire surface 1 vol lower on the day & 1.5 vol lower
on the week. While there was definitely some liquidation in the street,
sizes were not that large and clips of 100-150mm were enough to move the
market substantially. As liquidity was pretty lousy on the way up, it's no
surprise that there's little liquidity on the way down. We've also had a few
questions about the skew - ie, if it's being priced less aggressively can we
expect to see the Danes come back - but the answer from our guys is that if
it's illiquid in the ATM stuff, the OTM stuff is even worse. Having said
that, the formula that dictates the rate used to discount Danish liabilities
says they now need to use a lower rate (3.50%, down from 4% currently) and
if this rate is marked down a further 50bps at the meeting in 2 weeks time,
the long end bid to both cash and vol could return. Having said that, if
equities continue to grind higher - and our sec lending guys tell us overall
short interest is decreasing - the forced selling may not come to fruition.
Nevertheless, something to watch.....

LEVELS (close to close, ex basis)

SWAP CURVE
GBP/EUR(EUR convention)
	      today 	  t-1
5y5y		 -25		 -27 
15y15y	 -142		 -140
10/30?	 -37.5	 -34.0 
10/30E       +46.0	 +47.1	 

EUR SWAP SPREADS
5y:  Bobl 138	26.7 	1.0 narrower
10y: Jan 11 bund	33.8  1.0 narrower
30y: Jan 31 bund	21.6	0.7 narrower

GBP SWAP SPREADS
5y:	8h Dec 05   54.0  3.0 narrower
10y:	9 Sep 11	50.0	unch
30y:	6 Dec 28	35.0	2.0 narrower

EUR SWAP VOLATILITY
3m into 10yr	13.9 	0.7 lower
1y into 10yr	12.9 	0.7 lower
2y into 10y		12.5 	0.7 lower
5y into 5y		12.1	1.0 lower
5y into 25y		10.3	0.7 lower	
10y into 20y	9.6	0.8 lower
5y5y swaption/5x10 cap spread	2.5


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