EURi: Risk-off pulls forwards down from the highs

Deflated red balloon 21 Jun 2021
Risk-off and nominal bull-flattening helped to pull euro inflation forwards down from yesterday's highs.

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  • Forwards come off the highs

  • Inflation trades: Banks

  • New issues


    Forwards come off the highs

    Eurozone consumers and euro inflation markets both reported a fall in inflation expectations today. Consumers now expect inflation of 3.4% over the next 12 months and 2.3% over the next three years according to the ECB’s latest survey (see link), with both readings down by 50bps and 20bps, respectively, over the last three months. The latter is now almost back to the ECB’s 2% target.


    In comparison, EUR 1y swaps fell back to 2.98% (-7bps) today and EUR 3y dropped to 2.68% (-7bps) as a combination of nominal bull-flattening (the Bund rose by over a point) and pressure on global equities weighed on the inflation curve, led by the front end. Traders confirmed that inflation was "mostly offered" (especilaly in 10y) but added that selling flows weren't really significant, with even some dip buyers spotted despite and a bearish tone overall. Core real yields rose by 2bps at the very front end bu rallied by 2-10bos further out, led by the long end.


    In the background the Euro Stoxx lost 1.3% and Brent futures tested $83.5 at one point before recovering back to $85 at the close, down 30 cents on the day.    


    The steepening in the inflation curve slowed the decline in the long forwards after the latter made new cycle highs yesterday. However, EUR 5y5y still fell back to 2.6275% (-3.75bps) after testing a peak of around 2.67% on Monday, while 10y10y slipped back to 2.8675% (-3bps) from 2.90% yesterday.


    FRF inflation fell by 2-4bps led by the 10y area of the curve as the market digested the news yesterday of a legal challenge to the decision to freeze the Livret A rate at 3% for 18 months. Even so, EUR/FRF 5y widened to 14bps (+3.5bps) while 5y5y narrowed to around 31.5bps (-1.5bps).  


    SDR swap trades included EUR 1y at 2.9977% this morning, 10y at 2.648%, 2.626% and 2.6475%, 5y5y at 2.672% and maybe 2.6775%, and 25y at 2.8025%. FRF 7y traded at 2.8725% in €50m early doors.


    Inflation trades: Banks   

    Inflation trades suggested by strategists over the last few days include HICPx steepeners (Citigroup), real rate steepeners (SocGen), and a cross-market preference for TIPS on real yield (BofA):


  • Citigroup: “We remain in 5s/10s HICP curve steepeners, but this has primarily become a short view on 5y HICP considering the more limited (but not impossible) upside in 5y5y in our view. Further out, 15y15y HICP swaps are at their richest levels ever, but the beta to 5y5y we think warrants caution.


  • SocGen: “While 2y2y HICP remains the most attractive part of the curve, these levels are too rich for us to recommend a long exposure – we expect 2y2y HICP to remain in the 2.15-2.55% range, so we stay neutral at this level.


    “Long-end forwards even richer…We do not think there is a lot of volume going through the market, with the move proving quite directional (nominal swaps moving significantly at the long end). Our recommended 5s/30s real swap steepeners are performing well, with the nominal IRS curve bear steepening, while the breakeven curve has flattened. In line with our expectation of a further steepening of the nominal curve, we continue to see value in real swap steepeners  (we target -25bp, from -66bp currently).”


  • BofA: “The main message we want to convey is the overall expensiveness of long-dated Euro linkers versus US TIPS…We have written about the supply scarcity issues and the persistent bid for positive real yields driving the Euro side of this before and it's hard to know what might correct this situation materially. However, we have just been through the July index event for French linkers, delivering €1.8bn coupons and a 0.31 extension. Once we clear September's coupons and extension from Italy's linkers, some of the ‘frothiness’ in longer Euro inflation should subside.”


    New issues

    • SPIRE sold a €13.7m inflation-linked repack 1.7% due 7 Apr 2028. The note is linked to euro HICPx but repack unconfirmed. Lead is BofA.


    • Santander sold a €4.5m inflation-linked EMTN 1.28% due 10 Aug 2028. The note is linked to euro HICPx but further details unconfirmed. Self-led.


    • Credit Agricole sold a €5m inflation-linked EMTN due 24 Aug 2028. The note is linked to euro HICPx but further details unconfirmed. Self-led.