COMMENTS

EUR SWAPS
Flows generally light, with a continuation of the front end receiving action
from Tues pm, in both 1y1y and 2yr, albeit in smaller size into the dramatic
sell off. Swap spreads broadly tighter led by the front end, with 5yr 1bps &
2yr 1.5bps tighter. Curve flattening on the sell off, 2-10's 2.5bps flatter
in swaps, & heading for 5bps flatter in cash, the slack taken up by the
extra narrowing in s'end swap spreads. 10-30's 2bps flatter in line with
cash curve flattening to leave 30yr spreads broadly unch. 5yr
underperforming curve badly, with 2-5-10's fly around 13bps here, there are
a few offside posns at these lvls who could well get blown out if we push
much further. The market appears to have little appettite for risk at the
moment as dealers appear to have been burnt over the larger more prolonged
sell-off than expected. Price action and liquidity is very poor so far
today. No sign of Tresor in the last day or so, despite higher yields.

EUR BONDS
Same situation in Eur cash with the 5yr sector destroyed in the downmove
with s'end somewhat anchored. Today we have new Eur3.4-3.8bn 5yr btan
auction,  3.75% Jan 2007, trading around 5.5bp over the BTAN of July 2006,
in the grey market. This is expensive on terms of historical benchmark
premium & equates to around even to 138's in swap spread terms & around 4bps
rich to July 06 btan in swap psrrad terms. We are pretty indifferent at
these lvls & are seeing limited domestic interest, but can see it continuing
to trade quite expensive, at least in the short term, due to the equivilent
richness in the 5yr deliverable german sector and the scarcity of
alternative bonds in the 07 area. We also have the OAT reverse auction
today, with OAT 4% Apr 2009, 4% Oct 2009 and 5.5% Apr 2010 will be bought
back for a maximum of Eur2bn, with the 7yr sector trashed even more than the
5yr, it makes sense for the tresor to be prepared to pay up a little to buy
back still comparatively cheap bonds, but little sense for end clients to
tender, altho maybe worth waiting in the tail you might just get filled. 

EUR VIEWS
Financial markets have been keen to anticipate a recovery in global economic
activity. But in Europe, things still look bleak.
1.Euroland Q3 is coming in weaker than expected. German GDP was -0.1% in Q3
compared with our forecast of +0.1%. With Italy at +0.1% and the Netherlands
at -0.4%, Euroland GDP is unlikely to be better than +0.1%. We will have a
more complete picture tomorrow with France (our forecast is +0.25%)
2.The October German Ifo survey was very disappointing, particularly the
further marked decline in business expectations from 95.9 in August to 90.5
in September to 89.6 in October. This is one of the best leading indicators
of Euroland industrial activity and is one of the three components of the GS
leading indicator. Another component - the Belgian manufacturing confidence
index is out at 3pm today.
3.Perhaps most worrying of all, our European equity analysts report another
deterioration in economic activity in both Euroland and the UK in November
(see today's European Daily Comment for details). With few exceptions, our
analysts report that economic conditions are still deteriorating or are
stabilising at very low levels.
We are happy with our below consensus forecasts for GDP growth in 2002 of
+0.6% in Euroland (consensus +1.5%) and 1.4% in the UK (consensus 2.0%).We
also continue to believe that interest rates will fall by 50bp in both
Euroland and the UK over the next 3-6 months. There is value in the front
end of Europe.

LEVELS (close to close, ex basis)

SWAP CURVE
GBP/EUR(EUR convention)
	      today 	  t-1
5y5y		  -23		  -22 
15y15y	 -137 	 -140
10/30?	 -35.0	 -35.5
10/30E       +43.8	 +45.7	 

EUR SWAP SPREADS
5y:  Bobl 138	24.4  1.2 narrower
10y: Jan 11 bund	32.9  1.6 narrower
30y: Jan 31 bund	21.9	0.4 narrower

EUR SWAP VOLATILITY
3m into 10yr	14.6 	0.1 higher
1y into 10yr	13.1 	unch
2y into 10y		12.6 	unch
5y into 5y		12.5	unch
5y into 25y		10.6	0.1 higher	
10y into 20y	10.0	0.1 higher
5y5y swaption/5x10 cap spread	2.3

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