Citi recommends leveraged curve flattener on financials

In its most recent global structured credit strategy report, Citi recommends a leveraged curve flattener on financial names using first-to-default baskets. The report says the steepness of the curve between three and five years for certain financial names makes a compelling case for a flattener. An advantage of a first-to-default basket is that it allows leveraged longs on small selected baskets without the complexities of a full blown CDO.

The researchers recommend putting on a delta-neutral trade buying three-year protection and selling protection on the same names at the five-year maturity. But say the trade could also be delta hedged by selling protection on the basket and buying protection on the individual names depending on the delta of the name.