Forwards down as data, oil and duration rally weigh
Softer Spanish HICP (the first euro data for May), sharply weaker oil prices and a rally in duration combined to weigh on euro inflation today, with swaps finishing 5-16bps lower led by the front end. “Lower than expected Spain CPI and a strong rally on the nominal market pulled inflation down all day,” a dealer confirmed, with the latest trend described as “mainly bearish”.
Despite the curve steepening, today’s downmove was large enough to pull the long forwards lower as well with EUR 5y5y closing around 2.54% (-3bps) and 10y10y falling to 2.81% (-5bps). The latter peaked at over 2.87% at the end of last week on the back of real yield buying, significantly above the ECB’s medium-term target of 2% Meanwhile Bund, OAT and BTP futures all rose by just over a point while Brent futures fell by $3 on supply concerns.
As for the data, while Spanish core CPI inflation remained high at 6.1% in May it was still 30bps below forecast, and 50bps lower than last month’s print. Spanish headline HICP fell to 2.9% from 3.8% and missed the Bloomberg consensus forecast by 40bps. Next up preliminary inflation data from France, Germany and Italy are due tomorrow and Spain sells €250-750m of the SPGBei-33 on Thursday.
EUR 1y swaps fell by 16bps to at 2.83% today while FRF 1y fell by 16bps to 3.02%. In the reset market, EUR 1y Aug22 Aug23 traded at 6.13% and 6.14% according to the SDR, while EUR 1y Sep22 Sep23 went thorough at 5.68%. EUR 15y traded at 2.61% before falling a bit further to close at 2.59% (-6bps).
SocGen: Go long non-core linkers in IOTA
SocGen reviews the recent strength of long end inflation and suggests that it may be time for some longs to take profits:
- “May has seen increasing supply for ultra-long maturities. Yet, the performance of inflation breakevens highlights the resilience of inflation linked bonds. While inflation remains uncertain and with upside risk, investors are happy to get their duration from linkers, and certainly prefer linkers to conventional bonds for ultra-long maturities. This relative demand has pushed breakevens to all-time highs for post 15y maturities.”
The bank continues:
- “Our recommended longs in 2y2y HICP have reached our target of 2.35%. We have been expecting much narrower ranges since March, following the flight to quality in that month, and anticipating large falls in headline inflation. However, with inflation carry still attractive until the end of June, our bias is for more outperformance from here.
“We have seen less buying of ultra-long linkers after the large demand seen in April, though this can be partly explained by the €5bn of ultra-long linkers absorbed at the Italy syndication and French auction. In terms of flows by issuer, net buying of German linkers has remained strong while we have seen much less buying of OATei and renewed interest in SPGBei.”
The latter seems to have encouraged SocGen to go long non-core linkers in IOTA:
- “One way to retain a long breakeven bias is to continue to favour BTPei in IOTA terms (buying breakevens vs selling swaps). We recommended longs in BTPei-33 on 5 May and continue to look for delta z-spread to move to 28bp (currently 33bp).
“SPGBei-33 also looks relatively attractive at 24bp delta z-spread and has performed recently. Buying SPGBei 33 in IOTA is also consistent with our expectation of a new 10y SPGB soon and a recent trend of buying flows in SPGBei.”
New issues: SPIRE repack
- SPIRE sold a €30m inflation-linked repack 1.5% due 3 May 2028. The note priced at par and has coupon and redemption linked to HICPx. Repack unconfirmed and lead is JP Morgan.