EURi: Bull-flattening as gas and oil gain

Bull-flattening

A strong performance by the front end of inflation extended a move that began yesterday afternoon and saw EUR 1y close near session highs at 2.60% (+8bps) while EUR 5y5y rose to 2.55% (+2bps) as the curve bull-flattened. French inflation kept pace and FRF 5y rose back to 2.55% (+7bps) after testing 2.215% earlier this month in the wake of the decision to fix the Livret A rate.  OATei real yields rallied by 2-6bps, led by the front end.

The move came against a backdrop of tight ranges for the Bund heading into the FOMC and ECB meetings alongside gains for oil and gas futures, with the latter up another 7% to €32.7 after testing €24 only last week.  

A longish list of US-centric SDR swap trades this afternoon included EUR 1y at 2.61% in €100m, what looks like 1y1y at a low 2.42%(?) in €100m, 2y at 2.55% in €50m, and 10y a few times last at 2.51125%. In French inflation, FRF 3y went through at 2.45% in €50m. And EUR 3y Aug23 Aug26 traded at 2.543375% in €75m this morning.

Ahead, preliminary inflation data will start to be released from July 28, with French HICP likely to dip to 0.0%mom/5.1%yoy versus 5.3%yoy last month according to the Bloomberg survey, Spanish HICP is seen steady at -0.5%mom/1.6%yoy versus 1.6%yoy, and German HICP is expected to fall to 0.6%mom/6.6%yoy from 6.8%yoy. Flash euro HICP is due on July 31 and ahead of the national data releases, euro HICPx is seen at around 5.20% according to the reset market, having edged down since last week. The euro HICPx fix traded at 5.21% in €50m today.      

Italy sold €1.25bn of the BTPei-33 at 1.86% with bid/cover of 1.57 - the bond slightly underperformed its neighbours on the day after cheapening on the curve over the last week. Last night Italy confirmed the usual cancellation of the BTPei auction pencilled for August 25. (CORRECTS)

Gas profits taken, iota RV: Banks

In research, strategists at BNP Paribas suggest taking a quick profit on their recently recommended  (see Total Derivatives) long winter gas (Feb24) trade.

“The uplift over the last week has been largely driven by Russian supply fears due to the ramp-up of hostilities in the Black Sea. While this creates a risk of a human error reducing Russian flows, we still think that a disruption remains unlikely because with EU gas stocks above 83%, this weapon has lost much of its potency and hence is unlikely to be triggered on purpose.

 

“We have also seen increased demand on warm Southern European weather and Australian liquefaction maintenance tightening Asian markets, both of which are temporary and need to be weighed against returning suppliers from Norway. We therefore think there is limited near term upside potential to today’s forward prices for Feb24”

Elsewhere, Barclays likes a couple of inflation trades. Firstly, it finds long forward FRF swaps still “quite rich” versus EUR and it continues to recommend shorting FRF 20yfwd10y versus EUR 20yfwd10y.

“The current 20yfwd10y spread remains near 30bp, and above the prior maximum that held up until 2022. Over time, we expect the spread between the two to narrow. Most recently, the decision to hold the Livret A rate steady, rather than increase as would be suggested by the supposed formula, could reduce FRF demand, though this would likely be felt at shorter tenors.”

Secondly, it finds the OATei-38 “very tight” (ie rich) on iota, “even with the auction of the new OATei-34 providing supply (last) week”. In contrast, the Bundei-46 is judged cheap and “especially disconnected” versus the Bundei-33 iota. Barclays recommends going long the Bundei-46 against a short of the OATei-38 in iota with entry at 17bps, a target of 10bps and a stop at 24bps.