EURi: Sanguine reaction to CPI; 2023 supply talk

Rally sceptics; Supply talk

The S&P and the front end of the nominal Treasury curve had reacted a lot more to today’s US CPI numbers than global inflation markets, traders in Europe noted today. A 23bps rally in USTs was contrasted with the modest, 9bps undershoot in the NSA CPI outturn versus the reset market, and a big move in red EDs was blamed on pre-data positioning for correction to Fed pivot talk. TIPS were reported to be seeing a mixture of new longs and short-covering with forwards like 2y2y “holding up.” Meanwhile, the S&P steadily shed its initial post-CPI gains.

Echoing the sanguine TIPS market reaction to the data, euro inflation came off session lows into the close with the curve only mildly steepening on the back of a 3-4bps decline at the front end of euro HICPx versus a 2bps dip further out the curve, leaving EUR 5y5y at 2.37% (-2bps).

Traders said flows in euro were “mostly short covering”. In addition, a $3 rise in Brent futures back towards $81 was viewed bullishly (“turned a corner”), given reports that the rise was driven by Asian buying following China’s hasty Covid re-opening, with an eventual rise in Chinese energy demand seen benefiting the back months of the oil curve.

Meanwhile the Dec euro HICPx fixing had moved around 25bps lower over the last few days, according to dealers, who blamed a belated recognition of the impact of Germany’s energy support package on the inflation index.

Ahead, thoughts were turning to the first quarter and the prospects for linker issuance. France’s plans for a new 10y OATei were seen affected by the delay to a new nominal 10y OAT to the second quarter. However, in contrast to some trader's views last week, today the delay was seen opening a window for a linker in Q1 2023, in January or perhaps more likely February. The path of the next few inflation prints was expected to exert only a mild order influence on the AFT’s decision on timing.

Dealers were surprised at talk of a possible new long-dated German linker in 2023. Instead, the Bundei-46 was seen as small enough to tap further despite being old and off the run. A new 5y Bundei, launched via auction, was seen as more likely.   

Finally, new Spanish and Italian 15-20y linkers were expected – the latter along with a couple of new BTP Italia and, possibly, a retail structured note with a link to GDP from the new Meloni government.   

New linkers in ‘23 from France, Spain, Italy and even Germany? SocGen

Lower net supply of euro linkers is expected by SocGen for 2023 on the back of a “huge” amount of redemptions, estimated by the bank to total around €68bn (versus €30bn in 2022) rising to €92.6bn if the three maturing BTP Italia are included. All the lines have at least one maturing bond, SocGen adds, except OATei.

For gross issuance, the bank expects slightly higher volume of “around €58bn” in 2023, giving negative net issuance of €9bn. Supply is expected to include new benchmarks from France and Italy, as SocGen explains:

“(France) announced a new 10y OATei benchmark and the possibility of a new 15y OATi depending on market demand conditions. We forecast €24.5bn issued, with the new 10y OATei likely to come in auction format (for €3-3.5bn) in 1Q, while we pencil a 15y OATi via syndication after the summer (for €4bn).”

 

“Italy is likely to issue two new BTPei and BTP Italia. With €25bn of three BTP Italia bonds redeeming in 2023, we forecast two BTP Italia transactions in 2023. For BTPei, the redemption of the BTPei May and September 2023 (for €26bn) is also likely to result in new benchmarks created, in our view. We favour a 5y BTPei (BTPei 29) in 1Q – although this could be replaced by a new 10y BTPei later in the year – as well as a new 30y BTPei 2054 in 3Q, with the BTPei 51 trading well below par.”

As for the other linker issuers, SocGen also looks for new benchmarks from Spain and Germany.

“For Germany, a new 30y benchmark is possible in early summer, with the DBRi 2046s issued seven years ago in 2015, although a new 10y is always a possibility if the DFA prefers to build the DBRi 2033 quickly."

 

“For Spain, a new long 15y benchmark is due, not having issued a new line since 2019."

 

"Our gross supply forecast is €2-3bn larger than in 2022 for both of these issuers, with no new benchmarks created this year.”

Still, SocGen also expects supply to be adjusted to match demand and market conditions:

“Core inflation could continue to rise into the spring (we see a peak at 5.4% y/y). If we are right on this forecast, demand for linkers should remain above average, at least in the first half of the year. We think the lower net supply of linkers should ensure a relatively good performance despite the lack of net purchases from the ECB.

 

“If core inflation does start falling earlier and at a faster pace, demand for linkers may suffer, and supply of linkers may end up below our baseline forecasts.”