EUR 5y5y dips below 2.50%; OATei underperform before supply
Despite an unexpectedly dovish tone from the ECB’s Klaas Knot followed by risk-on moves in Brent (+$1.2) and the Euro Stoxx (+0.4%), euro inflation swaps fell by around 0.25-1.25bps today as EGBs rallied strongly, led by BTPs.
The fall in inflation was led by EUR 5y5y, which edged below 2.50% as the curve bear-flattened with the forward ending around 2.4975% (-1.75bps), its lowest level since mid-June.
French inflation clawed back some of its recent underperformance (see Total Derivatives) with the EUR/FRF 5y spread widening to around 10.5bps (+3.25bps).
In cash, with the €1.75bn to €2.25bn auction of a new OATei-34 scheduled for Thursday, OATei real yields fell by 6-10bps lagging the 10-15bps rally in OATi and the 10-14bps drop in BTPei real yields. The new OATei-34 is indicated on the screens at around 0.588% after trading earlier this week at a reported +15.75bps.
SDR swap flows included EUR 5y5y at 2.511% in €110m this morning and a trio of EUR 15y Jun23 Jun38 clips at 2.602%, 2.6215% and 2.569%. In French inflation, FRF 10y Jun23 Jun33 went through at 2.691% in €40m today.
Banks neutral on French versus Euro, recommend buying winter gas
Bank research this week looks at inflation and also at gas trades.
Firstly Citigroup suggests that the front end is too high, reckons that long forwards should continue to be supported and is neutral on French versus Euro inflation following last week’s Livret A fix.
- “1y and 2y HICP swaps look 15bp and 49bp too high against Citi Economics’ baseline forecasts…especially considering the risks are tilted to the downside, in our view.
“Further out…the level-adjusted richness in long-end forwards (measured by the current residual of a 12M regression of 10y20y HICP swaps against 5y5y HICP swaps) coincides with the break-out in nominal rates, hinting at opportunistic real yield demand at the long-end. This does not mean 10y20y HICP swaps are a fade, given the first order driver (level of 5y5y HICP swaps) has room to grind higher, in our view, with notably an expected slowdown in supply over the summer. This is not to mention the risks of a continuation of real yield demand.
“Livret A flows…should remain strong, despite Thursday’s announcement...There is no (other) liquid savings alternative easily available to the French
“Ballpark estimate of long-run FCPx-HICP prints is around 0%, in our view, now that the process of price convergence is broadly complete in the Eurozone
“(Short-run) FCPI-HICP spread uncertainty is compounded by uncertain inflation dynamics at the short end. In particular, regulated fares for gas disappeared at the start of July, and in scope customers who had not switched to a free market offer have automatically been put on some ‘bridge’ offer. There is however uncertainty around 1) how the statistics office will treat the change in offering and 2) the share of gas customers impacted.
“Note that 1) the bridge offer fare is lower than the regulated fare at the end of June and 2) free market offers’ prices also appear to have been falling. Right now, we estimate the July FCPIx fixing is broadly consistent with a fall in gas prices of about 14%, before increasing by 6% in August. Note that 14% MM inflation on French gas prices is worth about 24bp on France headline HICP and about 5bp on EA headline HICP.”
“OATi supply has slowed since the syndication and could remain modest over the coming months, especially against a backdrop where the AFT could favour OATei supply to match real yield demand
“The decision by public authorities on Thursday to keep the Livret A rate at 3%...is a signal we may be moving back to the old regime where authorities would regularly overwrite the Livret A formula. This may somewhat diminish the willingness to hedge the inflation risk at all cost going forward."
Second, BNP Paribas reckons that the Dutch natgas forward curve under-prices Feb24 at €48.7 given likely winter demand, and the bank recommends buying a call spread. The front gas future tested a cycle low of €24 on Monday and has climbed to €27.1 (+8%) today. BNPP explains:
- “Europe needs gas prices that price gas out of power generation during winter to keep storages filled ahead of next year’s filling season. Based on our models, this requires TTF to price at the top of the coal switching channel to incentivize power generators to run coal ahead of gas, which today is about €54/MWh.”
“We continue to believe in 1) normalized winter weather (i.e. colder than last year) which pushes up heating demand, 2) a gradual return of some industrial demand in Q4 and 3) Europe will want to keep its storages filled as much as possible to ensure high end-0f-winter stock levels.”
New issues: Santander
- Santander last week sold a €50m inflation-linked EMTN due 17 Jul 2033. The note pays euro HICPx YOY +1.70% floored at 0%. Self-led.