EURi: EUR off highs as FRF gains before AFT and data

AFT France Tresor Jan 2023
EUR inflation came down from morning highs but FRF kept on going led by the front end ahead of the AFT supply announcement and final French CPIx data.

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  • EUR inflation ends off highs; FRF outperforms before data and AFT

  • DB: Stay long EUR versus USD 10y inflation

  • Real interest rates seen falling back once inflation slows: IMF

  • New issues


    EUR inflation ends off highs; FRF outperforms before data and AFT

    Euro inflation curves flattened today and although EUR swaps rose by another 1-4bps, led by the front end, most areas of the curve finished off session highs with EUR 10y hitting 2.52% this morning before coming back down to end just off the lows at 2.49% (+1bp). EUR 1y1y closed at around 2.2775% (+1bp) after testing 2.3175%, and 5y5y finished at 2.4475% (+1bp).


    Following previous speculation about the possibility of a new 15 to 20y OATi syndication this month (plus plans for a new 10y OATei to be launched via auction sometime in 2023), French inflation strongly outperformed today ahead of the dealer meetings and the supply announcement (plus final French CPIx inflation data), with an auction pencilled in for April 20.  OATi real yields rallied by 2-3bps across the curve versus a 0.5-1.0bps selloff for OATei  and FRF swaps rose steadily to gain of 3.5bps to 7.5bps led by the front end, widening spreads to EUR by 2.75bps in 5y5y.   


    FRF swap trades don’t tend to feature much on the US-focused SDR but EUR 10y traded a few times last at 2.485% and EUR 5y went through at 2.53%. At the front end EUR 1y May23 May24 traded at 3.02% and later at 3.005%.  


    In supply today Spain sold €479m of the SPGBei-33, an amount in the middle of the Tesoro’s €250m to €750m target range with bid to cover of 1.95 (CORRECTS). The bond sold off into the auction, cleared at an average real yield of 1.055% and then outperformed on the curve before closing around 1.07%.


    Ahead, after final HICP for Germany came in unchanged at 1.1%mom/7.8%yoy today data for France, Spain, and the Eurozone are due tomorrow. Barclays economists are looking for euro HICPx to be 122.04 (6.94% y/y) and for FRCPIx to be 115.84 (5.60% y/y).  


    DB: Stay long EUR versus USD 10y inflation

    Stay long EUR versus USD 10y inflation, suggest analysts at Deutsche Bank today. The bank previously preferred EUR inflation on the back of “upside risks for the front-end, divergences in wage and food inflation dynamics and signals from our macro models.” Based on the more recent dataflow, including the March HICP/ CPI reports, it maintains its view:


    “The latest US employment report and average hourly earnings figures confirm the current divergences in the wage outlook. Similarly, March releases provided further evidence that current food inflation trend remains significantly stronger in EUR than USD. Finally, our models continue to suggest that 10y EUR inflation swaps are fairly priced, while 10y USD remains (rich) by ~ 12bps.”


    Real interest rates seen falling back once inflation slows: IMF

    The IMF’s latest World Economic Outlook, published earlier this week contains a chapter (link) on the long term development of the ‘natural’ rate of interest, defined by the IMF as the real interest rate that “neither stimulates nor contracts the economy.”


    Overall, the IMF researchers see natural real rates coming down again once inflation slows, but they suggest that high debt-to-GDP ratios are a long term risk factor to a renewed decline:


      “Common trends such as demographic changes and productivity slowdown have been key factors in the synchronized decline of the natural rate. And while international spillovers have been important determinants of the natural rate, offsetting forces have resulted in only a moderate impact on balance.


      “Once the current inflationary episode has passed, interest rates are likely to revert toward pre-pandemic levels in advanced economies. How close interest rates get to those levels will depend on whether alternative scenarios involving persistently higher government debt and deficit or financial fragmentation materialize.”


    New issues

    • Deutsche Bank launched a EUR inflation-linked note due 11 May 2027. The note is linked to euro HICPx inflation floored at 1.5%. Self-led.