EURi: ECB/US bank nominal rally weighs on inflation curve

ECB Building river 9 Jun 2022
An ECB/US bank driven rally at the front of the nominal curve helped bear-steepen euro inflation today, with supply and natgas adding to the pressure.

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ECB/US bank nominal rally weighs on inflation curve

Euro inflation continued to bear-steepen today against the backdrop of a modest 25bps ECB rate hike and renewed turmoil in the banking sector, with a clutch of small US banks once again under severe pressure.


Dealers tended to blame the front-end led nominal rally for the bear-steepening with EURIBORs as much as 21 ticks stronger in the reds after the hawks on the Governing Council gave up on their preferred 50bps hike “without much of a fight,” according to Bloomberg. Real yields couldn’t keep up with nominals with the result that inflation fell. In contrast, Wednesday’s plunge in the front of inflation was blamed more on energy and general risk off.  


EUR 1y swaps began to fall from lunchtime onwards to finish 10bps lower at 2.57% while EUR 5y fell by 3bps to 2.27%. Only the steepening prevented losses in the longer forwards, with EUR 5y5y ending a bp higher at 2.40% while 10y10y rose 2bp to 2.67% to remain near the highs.


Brent briefly slipped to test $71.3 on growth concerns before recovering to $72.6, but traders said that the 3% fall in front month gas futures to under €36 for the first time since July 2021 was probably more negative for inflation than oil today. The Euro Stoxx 50 ended around 0.5% lower and the Euro Stoxx Banks index fell by 1.6%.


Traders did not sound particularly impressed by the ECB Governing Council’s inflation-fighting talk (“the inflation outlook continues to be too high for too long…incoming information broadly supports the assessment of the medium-term inflation outlook that the Governing Council formed at its previous meeting… underlying price pressures remain strong”) and focused instead on the reference to the (negative) impact of higher rates on “euro area financing and monetary conditions”. Indeed, the market “went back to trading the US banks” 15 minutes after the ECB, according to one market participant.  


BTP and BTPei underperformed core today. The ECB’s announcements on the APP and the PEPP were not seen as linker-friendly given upcoming redemptions but the spread widening versus Bunds was attributed to (global) credit concerns plus linker supply hangover in the 5y sector following the unexpected launch of a new BTPei last month. Core real yields fell by 1-7bps across most of the curve except the long end, where yields rose 0-2bps.  


Meanwhile demand at Spain’s €559m auction of SPGBei-27 was judged unimpressive today, with bid to cover of 2.01 at 0.652%. Ahead, the market is watching for news on the long-awaited syndication of a new 15-20y OATi.


Finally in swaps, the Total Derivatives SDR showed trade in EUR 1y at 2.72% and 2.685% (pre-ECB), 9y at 2.3375% and 15y at 2.435%. EUR 17y traded again, at 2.474% in €12m.