AFT 10y decision awaited; 5y flows
The wait for Germany's inflation data ended this morning (a below-Bloomberg 9.2% although the market still didn’t get the index weights – see below) but traders said the market was also on hold for this week’s French supply decision. The dealer meeting is due around the time of writing, to be followed by the announcement tomorrow with a new 10y OATei on the cards for next week's auction.
Traders said they'd seen buyers on the whole curve this week and most were reluctant to guess the AFT’s intentions. Iotas were judged to be on the rich side and the AFT is "supposed to tap rich paper” but a dealer added that “a lot” of bonds are rich on the French curve, with some hedge funds said to be trying to oppose that richness.
In swaps, the volatility of the short end and the 5y area both drew comment. At the front end, the delayed German inflation data was lower than some expected and EUR 1y swaps fell by 3.5bps to 2.4225% in what dealers termed a correction to recent gains. EUR 2y lost 4.75bps and 1y1y fell by 5.75bps. Traders also pointed to weakness in the French fixings but were unable to give a firm reason with FRF 1y down 7.5bps to 3.315%.
Illiquidity in EUR 5y contributed to choppy trading, according to dealers, with the swap ending around 3.5bps lower at 2.36% after going through at 2.3725%, 2.366%, 2.37%, and 2.415%, according to the SDR. For more swap trades please see the Total Derivatives SDR here, which now also includes information on broker, platform or venue for every trade. Further out, EUR 5y5y forward ended just 0.75bps lower at 2.355% as the inflation curve (bear) steepened.
Still waiting for weightings: Deutsche Bank
Analysts at Deutsche Bank reviewed the breakdown of today’s delayed German inflation data:
“The strong negative seasonality in package holidays is particularly pronounced (c. -25.0% m/m on average in January). Unfortunately, neither Destatis nor Eursotat provided us with estimates for 2023 HICP weights in Germany. However, as we have provisional weights for EA and several countries (including France, Italy and Spain), we can derive the implied provisional estimates for 2023 package holidays in Germany.”
“Results suggest that HICP package holidays weight in Germany could have risen by 2.1pp to 3.3% (from 1.2%). This would imply a mechanical impact of c. -0.5pp on headline HICP and c.-0.6-0.7pp on core HICP in January.”
“Furthermore, estimated new weights suggest that package holidays should mechanically push Germany headline HICP upwards over the summer period (June and July by approximately 0.6pp cumulatively).”