EURi: Dovish central banks help real yields track the rally

Dovish central banks help real yields keep up

Euro inflation was relatively resilient today in the face of a 15bps rally in 10y Bunds. Traders said that the fact that the nominal rally was driven by two dovish central decisions, rather than by pressure on the banks an risk off, helped real yields (almost) keep up with the gains following buying of French and German linkers over the last couple of sessions.

EUR 1y rose by a couple of bps to 3.73%, 5y5y only fell by a bp to 2.37% and 10y10y rose by 2bps to 2.64% with dealers citing buying of the forwards and real money interest in the belly of the linker curve, rather than LDI demand. For swap flows, please see the Total Derivatives SDR.

Activity was a touch lower than yesterday but some traders expected to see further interest in real yields. Meanwhile the absence of linker supply this week was providing support after the AFT decided to reopen the OATi-36 at the auction earlier this month rather than using the opportunity to launch a new OATi in March.

In the background, the US Treasury sold $15bn of the 10y TIPS with dealers in Europe watching USD breakevens squeeze up into the supply. The TIPS auction cleared with a pretty average set of results and breakevens were little-changed on the immediate follow with the 10y off the pre-auction wides but still around around 3bps wider.

In other supply news, after a weak day for BTPs Italy announced plans to sell another €1.0-1.5bn of the BTPei-33 on March 28. Speaking shortly before the announcement, traders were uncertain about Italy’s likely auction choices but were expecting a couple of lines rather than more of the BTPei-33.

Ahead, as well as next week’s Italian auction, the release of national flash HICP data from March 30 onwards was seen as potentially the main event for the inflation market next week.