Looming auction sparks opposite of FOMO
Euro inflation was better offered for much of today, according to traders, before a US-led duration selloff and real yield buyers arrived during the afternoon to lift the market. EUR 1y bounced off lows around 2.76% to finish at 2.785% (unch), 5y rose from 2.325% to 2.3575% (+0.75bp) and 10y ended at 2.3975% (0.75bp) after a similar round-trip.
Ahead, dealers were resigned to overpaying at tomorrow’s French auction (a day earlier than normal due to the Ascension Day holiday) and then seeing the market fall on the follow. The AFT plans to sell €1.5-2.0bn in OATei-29, OATei-36 and OATei-53. The lack of an OATi among the bonds on offer would seem to open a window for the syndication of a new 15-20y but some traders took a different view. “No-one asked for an OATi. There’s no demand – look at the fall in French inflation” over the last few days, suggested one. What about the big inflows into Livret A, asked Total Derivatives? “They can just hedge in euro inflation,” the trader responded, adding that the market was also wary of a new BTPei coming at some point.
Inflation swap trades on the SDR today included FRF 2y June early doors at 2.7725% and FRF 2y May later at 2.86%. What looks like EUR 5y5y traded at 2.429%, EUR 5y at 2.345% and 2.3525%, and EUR 10y at 2.368% and 2.3775%.
Citigroup: Awaiting opportunities for RY longs
Inflation strategists at Citigroup this week highlight ‘inconsistencies’ between inflation and nominal rates pricing, leaving the bank looking for future opportunities to enter 10y real yield longs and/or mulling EUR 5y5y/10y10y inflation flatteners. Citi explains:
- “The nominal rates market prices in about 1% of easing in 2024. This feels wrong: would the ECB actually cut rates so aggressively in an environment compatible with flourishing inflation expectations?”
“(But) the problem with fading the richness of implied policy rates in 2024 relative to breakevens is that term premium can be driven by outside drivers (Fed pricing, directly or as a proxy for global macro)…(And) breakeven levels, when considered in isolation, are not inconsistent with the current monetary policy stance.”
“Using matched maturities (10y HICP) and 10y ESTR (to remove swap spread noise), we note the 10y real rate has stabilized at 0.27%. Considering 1) the YTD empirical resistance around 0.5%; 2) financial stability concerns arguably preventing long-end rates shifting much more restrictive; 3) the increased chances of a provoked slowdown if the ECB is forced into hiking too much in the near term and 4) global macro uncertainty, received positions in 10y real yields look attractive. Unfortunately, Thursday’s risk-off rally leaves us with a missed opportunity, and wait for better entry levels.”
“In RV, 10y10y HICP swaps keep outperforming shorter dated forwards (5y5y), with the relative spread approaching its widest levels over the past year. This widening of this spread has perhaps been driven by long-end real yield demand in a relatively imbalanced market, making positioning at risk of further flows.”
New issues: MS, Citigroup
- Citigroup last week sold a €50m EMTN due 23 May 2033. Coupon pays 1.61 * euro HICPx floored at 0%. Self-led.
- Morgan Stanley last week sold a €50m EMTN due 1 Jun 2033. Coupon pays 1.56 * euro HICPx. Self-led.
The latest brace of MTNs takes total issuance of broadly similar 10y, inflation-linked EMTNs over the last few weeks to around €350m – see the section in Total Derivatives for a summary of other recent deals.