EURi: FRF underperforms as OATi news awaited

OATi news awaited

Euro inflation shed early gains to close 1-2bps weaker in the swaps following weak US PPI, a fall in Brent and a global duration rally. However, traders were probably more interested in events over the next 24 hours with the AFT primary dealer meetings this evening to be followed by the supply announcement tomorrow.

Anticipation of a possible new 15-20y OATi syndication this month was heightened by underperformance in French inflation today as FRF lost around 3bps at the long end. Unconfirmed French swap trades on the SDR included FRF 2y at 2.91%, 2.91875%, 2.93%, 2.85% and 2.94%, FRF/EUR 5y at +46bps (2.85%), and FRF 3y at 2.83%.

Interest in 0% zero coupon floors was also interpreted as a sign of potential asset swap demand for a new French bond. Dealers added that if the AFT announced a longer dated OATi among the upcoming auction bonds on Friday, then the market would be disappointed.

Meanwhile real money maintained its interest in real yields according to dealers, despite the rally over the last few days. And while BTPei were described as ‘squishy,’ hedge fund selling was being met by some asset swap demand.  

Finally, the emergence this week of a giant, €1.27bn Italian structured MTN linked to 10y CMS floored at 3% via BNPP and Intesa Sanpaolo generated some envy among linker traders today. “Why can’t they do inflation?!” grumbled one.  

BNPP: High services inflation to constrain ECB   

Services inflation is likely to remain high enough to concern the ECB even if the core rate begins to fall slowly in coming months, according to economists at BNP Paribas. They forecast a rise in the rate of HICP services inflation from 5.2% in May to a peak of 5.7% in July before falling back only gradually to 4.6% at the end of 2023. BNPP explains:   

“We see no signs of a near-term slowdown in eurozone services inflation, as tight labour markets and robust wage growth are likely to keep fuelling broad-based growth in services prices.

 

“Although tighter monetary policy should increasingly weigh on demand over coming quarters, it is likely to bring down services inflation only with a lag.

 

“As a result, while we think the overall core rate has already peaked, we expect services inflation to reach a peak in July and to decline only slowly, ending the year above 4%.

 

“While the directional shift will allow the ECB to pause its hiking cycle at 3.75%, it will not be comfortable cutting rates for a long while.”

New issues: DB, UBS notes

• Deutsche Bank launched a EUR retail inflation-linked note due May 2025. Self-led.

   

• Deutsche Bank launched a EUR retail inflation-linked note due May 2027. Floored at 0.75%. Self-led.

   

• UBS launched a €1m variable coupon inflation-linked note due May 2024. Self-led.

   

• UBS launched a €1m zero coupon inflation-linked note due May 2024. Self-led.