FRF down as new 15y OATi confirmed
The announcement of a new French OATi due 1 Mar 2039 for launch via syndication through Barclays, BNPP, CA, DB and JPM was accompanied by bear-flattening and underperformance at the long end of the French inflation curve today, despite the deal being widely-discussed last month. Dealers said that although the market was expecting the bond the timing “wasn’t obvious” since there had been “several” possible windows in the past that the AFT had decided not to use.
FRF 15y swaps dropped by 6bps to close at 2.91% while EUR 15y fell by 3.5bps to 2.575%. Similarly, longer-dated OATi real yields rose by around 5bps versus a 2-4bps increase in OATei yields.
In the news, the latest monthly survey for the ECB found a fall in 12m consumer inflation expectations to 4.1% in April from 5% in March, while 3y ahead expectations shrank to 2.5% from 2.9%. For comparison, EUR 1y swaps ended April at 3.28% while 3y were 2.60%
Elsewhere, with gas futures taking back roughly half of Monday’s 20% rally and Brent recovering from morning weakness to head for the close little-changed at $76.5, the front end of euro inflation fell by around 3-4bps with EUR 1y1y finishing at around 2.29% (-4bps). 5y was the weakest area of the EUR curve with the swap down 5bps to 2.43% versus a fall of around 3bps in the long forwards, with 10y10y slipping to 2.81%.
In addition to confirmation of the French supply, Germany sold €275m of the Bundei-33 at 0.00% with bid to cover of just 1.3 despite a €125m retention, along with €185m of the Bundei46 at -0.05% with bid to cover of 1.4 and a small, €15m retention.
SDR inflation trades included EUR 10y a few times starting at 2.4825%, 2.48% and 2.4625% this morning, and 2.4675% this afternoon. EUR 8y went through at 2.45% and 20y at 2.6375%.
Barclays: Short inflation and real rates
In the research this week, Barclays suggests shorts in both EUR 5y5y inflation and real rate swaps, as the bank explains:
- “Forward euro area inflation is rich, in our opinion, but we see no obvious catalyst to drive a repricing
“Whether this general richness reflects true expectations for elevated inflation in the medium term, a growth in inflation risk premium or a distortion from strong buying flows, is a matter of debate – the answer is likely ‘a bit of all of the above’.
“Real rates, by contrast, tell a very different story. After repricing higher in 2022, they have now stabilised in low but positive territory
“We see this pricing as inconsistent. Either a) the market is correct to price elevated medium-term inflation expectations, in which case forward real yields should rise to reflect a tighter path of monetary policy, or b) we are truly reaching the end of the hiking cycle and stabilisation in inflation pressure, allowing the market to price more neutral real rates, and the forward inflation premium should moderate.
“(We) recommend shorting both 5y5y HICPx swaps and 5y5y real rate swaps, to position for the spread between the two to tighten as one of the two scenarios listed above to play out. We enter the trade with a spread of 226bp, target 175bp, and set a stop of 250bp.”