Supply arrives; 10y action
Euro inflation traders say it has been one of the more muted week’s of the year in terms of flow, despite supply events from both Germany and Spain in the calendar.
Yesterday, Germany tapped €390m of the Bundei-33, “Overbidding was three cents… The auction wasn’t a huge driver (of flows),” reported one dealer.
Still, some areas were singled out as seeing activity recently, such as the 10y sector of the euro inflation curve, according to one source. Today, EUR 10y was marked at 2.5225% (-0.75bp) having peaked as high as 2.545% intra-day on the screens yesterday (although no trades were confirmed at this level).
Ahead, the next supply event will be the SPGBei-27 on Thursday, “Tomorrow’s auction should be pretty light,” a source felt.
In the background, nominal bonds rallied first thing today with the 10y Bund future gaining around 50 ticks after Euro PMIs printed lower than expected and the ECB’s consumer inflation expectations survey revealed a slowdown. However, since then the market has retreated alongside USTs and the 10y future was near unchanged.
Back in inflation markets, EUR 5y5y inflation was little changed on the screens and last marked at 2.55% (-0.5bp). For details of SDR swap trades, please see link.
Strong flows - Barclays
In its latest rates weekly published the end of last week, Barclays reports that “strong flows” were a factor in underpinning recent euro inflation strength. The bank writes:
- “An exacerbating factor for some of the richness in forward inflation is very likely flow-related. While this can be hard to show due to data limitations, since February, we have noticed a pattern where inflation has often ground richer throughout a given month rather than sharply reprice on data and/or event risk, which could reflect ongoing flow behaviour (one obvious exception to this was the global risk-off move in early March on banking stress).
- ”For both 2yfwd3y and 5y5y HICPx, this trending behaviour was especially notable in February (partially setting the stage for March’s sharp pullback), but has also been apparent in both May and June.
- “To the extent that ongoing demand flows have sustained upward pressure on forward inflation pricing for a given nominal path, the effect would be similar to the growth in inflation risk premium… Indeed, if one thinks of inflation risk premium as the residual between market pricing and expectations, these factors are two sides of the same coin.”