EURi: Steeper as energy slides; BTPei-33 concession; Bank views

Gas tanker sunrise 11 Oct 2021
Euro inflation re-steepened as oil and gas futures lost ground. In cash, the BTPei-33 underperformed ahead of this week's auction.

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  • Steeper as energy slides; BTPei-33 concession built

  • Steepeners, BTP Italia, BTPei-32 longs and FRF shorts: Banks

  • New issues: Citigroup


    Steeper as energy slides; BTPei-33 concession built

    Lower gas and oil prices plus nominal bull-flattening helped to steepen the euro inflation curve today, although some traders said they were expecting an even stronger steepener today, "especially on the cash side."


    EUR 1y swaps fell by 6bps to 2.38%, taking back a big chunk of yesterday’s 7bps gain, while 2y fell 5bps and 5y5y rose 2bps to 2.30%, its highest level for a week.


    The slide in Dutch gas futures began late yesterday and the front contract is back under €60 today at €58.2, down almost 12%. Similarly Brent fell through $87, down $1.4 weaker. ECB speak from Nagel, Villeroy, Vujcic, Panetta and Simkus expressed a range of views on the outlook for rates further out, but didn’t push back against a 50bps hike next week.    


    In cash, the BTPei-33 underperformed on the Italian curve as the bond started to build a concession after the Treasury announced plans for a €1.25-1.75bn tap on January 26th. Traders confirmed activity in the BTPei-33 on screen and in the brokers.


    French inflation continued to soften led by the 5y area and the OATi-28. French inflation swaps also steepened as FRF 1y fell by 8bps to 3.51%. FRF/EUR 5y tightened by around another 3bps on the screens, to 41bps.   


    Swap trades today included EUR 10y a few times at 2.26%, 2.28% and 2.275% early doors, traded up to a high print of 2.302% through the afternoon, before falling to 2.2875% at the end. A rare clip of EUR 50y went through on the Tradeweb SEF at 2.74% in €16m.


    In French inflation, FRF/EUR 5y went through at 40bps and 41bps, while FRF/EUR 10y traded at what looks like 40bps. FRF 5y and 10y both dealt at 2.6975%, the latter before the front end lost ground into the close. For more swap flows, please see Total Derivatives SDR, which now includes platform/broker information for each trade, where available.


    Steepeners, BTP Italia, BTPei-32 longs and FRF shorts: Banks

    Bank research this week likes steepeners, BTP Italia, BTPei032 B/E longs and French inflation shorts:


  • Citigroup: “We recommend fading the weakness in 5y5y HICP by entering 5y5y/10y10y HICP curve flatteners, a low beta way to express a modestly bullish view on breakevens….We see value in 2023 BTP Italias at current levels.”


    “5y5y HICP swaps now look modestly cheap on RV vs 5y HICP swaps and SX5E equity prices…(and) the 2y3y/5y5y HICP curve directionality vs. level of 2y3y is shifting back to the longer-term regime.”


    “A combination of balance of risks to the inflation outlook being tilted to the upside, and positive premium, should keep 5y5y inflation above 2.20%.”


    “10y10y looks 6bps too rich vs. 5y5y on a 1y regression…Enter tactical 5y5y / 10y10y HICP curve flatteners (at) 30bps…Target: 20bps, stop: 35bps”


    “It feels natural to worry about BTP Italia in an environment where gas prices fall fast, especially since the Italian energy regulator changed the rules to calculate regulated gas tariffs so they reflect cheaper commodities prices faster…(Still) BTP Italia remain cheap under our CAS framework when we input Citi Economics FOIxT forecasts….Our economists’ analysis suggests a 25% fall in gas prices would be required to move Italian headline inflation 0.5%pt lower.”


  • BofA: “We maintain our 10y BTPei breakeven long, despite collapsing energy prices. As a hedge, we recommend an outright short in 5y5y French inflation.”


    “A sub-2% (BTPei-32) breakeven rate with 6bp of positive carry over twelve months is still attractive to us, notwithstanding the year-on-year base effects of falling energy prices. Core inflation at 5.2% (and still climbing in December), with the ECB's 'supercore' measure at 5.9%, provides some support for our faith in a degree of inflation persistence in the Euro Area.”


    “Livret A demand is always a perplexing issue. The main Livret A rate will go up to 3% next month, which in principle should attract inflows into Livret A and related accounts. However, as a tax advantaged rate which was already above standard retail deposit rates, the possibility of a surge in inflows is tempered by the likelihood that most who are able to would anyway have taken advantage of their maximum allowances”


    “A bigger reason for the strength of French inflation versus Euro inflation over the past year is that the perceived French/Euro inflation basis risk has gone up. With higher inflation has come greater country inflation rate dispersion, increasing the idiosyncratic country inflation risk in being short French inflation versus euro.”


    “Demand for French inflation, specifically, comes down to practicalities - there is an acceptable limit to the level of expensiveness, so the judgment call is always more about how much of a premium is too much, than whether there is more or less money going into Livret A accounts. The recent mild softening in forward French/Euro inflation spreads despite the Livret A developments hints that the market has been flirting with that limit.”


    “We would consider entering a 5y5y France/Euro inflation narrowing trade, but since we are looking for something to hedge our inflation persistence theme discussed above, we recommend an outright short in 5y5y French inflation here at 265bp, targeting 220bp with a stop loss at 290bp.” 


    New issues: Citi

    • Citigroup launched a €50m (max) 5y inflation-linked note due 2 Mar 2028. The EMTN pays 5% for the first year, then pays euro HICPx inflation flat, floored at 0%. Self-led.