EURi: Not enjoying the rollercoaster ride

Arrow up and down Oct 2022
Euro inflation traders rode the rollercoaster downwards today and they didn't seem to be enjoying the ride very much

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Not enjoying the rollercoaster ride  

A rollercoaster trading range from 2.63% (+13bps) at the open, down to 2.50% (unch) at the close for EUR 5y swaps, coming on the heels of an 18bps plunge yesterday, highlighted the difficulties facing the euro inflation market at the moment – along with all the other markets.


“You can still get things done but you have to pay,” sighed one inflation trader pointing to the extreme volatility and choppiness of the market.


The ECB didn't seem to help much, despite saying that it was ready to provide "liquidity support" if required. The central bank hiked rates by 50bps as many were expecting and warned that projected inflation of 5.3% in 2023, 2.9% in 2024 and 2.1% in 2025 was “too high for too long.” However, dealers highlighted that the curve was only pricing about one more 25bps hike, which was hardly very hawkish and probably supportive for inflation.


The ECB added that it saw core inflation at 4.6% in 2023, higher than in its previous forecasts, 2.5% in 2024 and 2.2% in 2025. Inflation was seen falling as “the upward pressures from past supply shocks and the reopening of the economy fade out and as tighter monetary policy increasingly dampens demand.”


In supply news, France sold the full €1.5bn linkers at the auction but dealers were unimpressed with the results, with little overbidding and a sharp fall afterwards causing the market to “choke” as it tried to absorb the supply as inflation dropped. The €450m OATi-36 was covered 2.47 times at 0.32%, the €756m OATei-29 was covered 1.89 times at 0.14% and the €270m OATei-53 was covered 2.37 times at 0.45%.   


EUR 10y started trading today at 2.50% only to finish at 2.415%, according to the Total Derivatives SDR. EUR 5y5y fell from 2.4725% at the open to 2.33% (-3bps) at the close as the curve flattened, while EUR 1y1y rose late in the session to end around 2.16% (+5bps) as EUR 2y outperformed. Core real yields rose by 12-16bps. TIPS breakevens fell by 7bps in 5y. At least oil and gas finished off the lows.