EURi: French round-trip. Slaughter and the dogs

Dog in winter 7 Jul 2021
A round-trip for FRF inflation, bear-steepening in USTs ahead of the TIPS auction and upcoming Italian supply were all cited by traders today.

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  • FRF roundtrip; UST pain

  • Tail leading the dogs? ECB

  • New issues: CS


    FRF roundtrip; UST pain

    Traders tended to agree when a tired Total Derivatives suggested that it was “not really” an inflation day today. However a big roundtrip in FRF, the approach of the TIPS sale and upcoming Italian supply provided plenty of inflation-specific things to chew over, against the backdrop of a plunged in the Bund of around a point following FOMC and BOE rate hikes.


    Dealers away from the flow were slightly unsure why FRF 5y5y inflation had been bid from the open with the spread to EUR 5y5y heading to 50bps. However, data released yesterday showing a strong €5.28bn inflow into the savings accounts in August was mentioned, with projections of €STR and French CPIx pointing to potentially attractive returns on the (tax-free) accounts in future.


    FRF/EUR 5y5y surged to test 53bps before coming back to 50bps at the close, up by around 2.5bps on the day. Dealers also reflected on the AFT’s linker auction earlier this month (see Total Derivatives) when the agency decided to sell the “niche” OATi-25 rather than the widely-requested  OATi-36.


    “Slaughter” in the US Treasury market as the curve bear-steepened led by the 10y ahead of the record, $15bn TIPS reopening was also a key topic. TIPS breakevens were +2bps shortly before the tap with some pre-auction squeeze but dealers in Europe said the big UST selloff and the steepening were both a shock given talk of peak hawkishness in the wake of the FOMC meeting, and expectations for flattening rather than steepening along the UST curve.


    Finally, confirmation late today that the Italian Treasury plans to sell €750m to €1.25bn of the BTPei-33 on September 27 was not a surprise, according to dealers, and it may have contributed to some sellers of EUR 10y swaps today which finished around 2.6525% (+1bp) versus 5y at 3.0675% (+4bps).  


    EUR 5y5y fell by 2bps to 2.235% while 1y rose 4.75bps to 5.765% even as gas futures crept into the red. SDR inflation trades (link) included FRF 1y in €100m at 4.10%, FRF 5y at 3.235% and then at 3.20% later in the session, and EUR 20y at 2.595%.  


    Tail leading the dogs? ECB

    How much weight should central banks and investors put on the minority of forecasters expecting higher long term inflation? The ECB’s latest Monthly Bulletin, published today (link), examines whether a 'tail' of respondents reporting higher long term inflation expectations to the ECB’s Survey of Professional Forecasters are a leading indicator of changes in the centre of the inflation distribution.


    Using some causality tests on a small sample of data points, the ECB’s research reckons probably not. Instead, it suggests that the tail of maverick forecasters are, in fact, over-reacting to short term information by daring to forecast inflation persistently above the ECB's target:


      “…Our analysis thus suggests that the tail group’s expectations have not led movements in the expectations of the rest of the professional forecasters. Some recent research argues that the right tail of the forecasters’ distribution is composed of fast learners, identified as those attentive to new data and news. According to this view, forecasters who updated their beliefs early were good predictors of the future. Our findings suggest that respondents in the tail group are more sensitive to the current developments than other forecasters and might be extrapolating short-term inflation dynamics more strongly and persistently into the longer term.”


    New issues: CS

    • Credit Suisse launched a €5m (max) EMTN due 4 Oct 2032 at par. Coupon pays 6% in the first year and then linked to euro HICPx inflation +1% floored at 0%. Self-led.