EURi: Bear-steepening after hawkish ECB, oil and supply

ECB Eurotower view
Euro inflation bear-steepened today against the backdrop of a hawkish ECB decision, a big selloff in Italian assets, French supply and weaker oil.

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Bear-steepening as ECB’s hawks win, oil falls

The ECB’s chunky 50bps rate hike (statement) along with the introduction of the Transmission Protection Instrument (link) and weak US Philly Fed data combined to produce big swings in euro rates and bear-steepening in euro inflation, although the curve ended off post-ECB session lows.


In nominal world the Bund rose 45 ticks, EURIBORs fell by 6-10bps in the whites and the 10y BTP-Bund spread surged to 231bps (+18bps) as the market decided that snap elections in Italy set for September 25 were more important than the ECB’s new anti-fragmentation instrument. Meanwhile TIPS breakevens fell by 4bps ahead of today’s 10y auction, Brent futures lost $2.5 and Netherlands gas futures finished little-changed after the Nord Stream pipeline returned to 40% capacity.


In inflation, linker real yields underperformed nominals in the selloff after the ECB delivered a larger-than-expected hike and gave a hawkish statement about future tightening. Core real yields rose by 2-15bps out to 10y but came in a touch beyond 10y even as the market digested €1.5bn in OATei and OATi supply. Core breakevens tightened by about 2-7bps. BTPei real yields surged by 20-30bps right out to the long end, and Italian breakevens tightened by 5-12bps.    


Still. France managed to sell the full €1.5bn in linkers shortly before the ECB decision divided across €415m in OATi-28 (bid to cover of 2.94), €768m in OATei-31 (bid to cover of 2.13) and €310m in OATei-53 (with bid to cover of 2.58). The OATei-31 outperformed on the curve on the day.


In swaps, EUR ended 3-7bps lower led by the front end as oil fell, with bear-steepening pulling EUR 1y down again to 6.35% (-7.25bps) while 5y5y fell to 2.05% (-3bps) and 30y edged down to 2.40% (-2.75bps).  The SDR shows EUR 5y starting the day trading at 2.7975% before falling to test 2.73% before coming back to trade at 2.75% (-5bps)  at the close (5s/10s at 35.25bps). Similarly EUR 10y fell from 2.44% to near 2.38% before ending at just above  2.40% (-3.75bps).


Ahead, Italy announced plans to sell €750m to €1.25bn in BTPei-33 and BTPei-41 at the auction scheduled for July 26.