Play bullish bias via forward-long index trades, says BNP Paribas

In research published today, BNP Paribas notes that a combination of low-conviction bullish bias and tail risk has created market uncertainty. Trading analysts recommend trading the bullish bias via forward longs and the tail risk via options.

The forwards two-year in three-year in iTraxx Europe and CDX IG, trading at around 150bp, are the best strategies to be long risk, says BNP. They trade at the wides due to the extreme steepness in two- / three- / five-year curves whilst the five-year is still reasonably wide. This limits downside risk and makes risk / reward skewed in favour of forwards versus flatteners.

Analysts also propose two bullish pair-trades strategies: long risk Crossover versus short risk Europe (to ratio of four times) and long risk the Senior Financials basket versus short risk non-financials (times 1.5).