Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Inflation: With Supply Comes Opportunities
• GLOBAL: Supply discount except for TIPS.
• EUR: Long FRF/EUR BE. Watch prel. data.
• USD: 10y TIPS a test without concession.
• GBP: UKTi-55 – value in RY, BE and ASW.
GLOBAL: Equities, commodities and breakevens
are back towards local highs (Chart 1) but have yet
to break above the post-Lehman range. Positioning
is much less extreme on equities and rates than in
November/December (Chart 2) while on commodities
net speculative oil positioning remains close to multiyear
highs (i.e. on the long side). Inflation concerns
continue to dominate with December data showing
inflation rates rising, albeit largely due to food and
energy as expected. Indeed, the market’s increasing
anticipation of monetary tightening, at least in the UK
and eurozone, is ultimately not bullish for inflation
especially inflation forwards. More pressing in the
near term and potentially weighing on breakevens
generally is the significant supply in the final week(s)
of January – France’s EUR 3bn BTANi-16 launch on
Thursday, BTPei supply next week, USD 13bn TIPS
Jan-21 launch and the syndicated re-opening of
UKTi-55 (likely to be around GBP 2.7bn notional).
With the exception of the US where there has been
limited (if any) cheapening ahead of supply, BTANi-
16, UKTi-55 and probably BTPei supply offer good
value after previous underperformance/cheapness.
EUR: The AFT issued 2.995bn (top of the range) of
BTANi 0.45% July 2016 at an average price of 99.48,
i.e 12 cents above grey market levels. A bid/cover at
2.11 is good for such a size and compares with 1.8
for the OATi-19 launch a year ago and 1.5 for OATei-
22 in May. The BTANi-16 is currently trading 21bp
through the OATi-17 and still looks a bit cheap in our
view even though the floor has already lost a third of
its value (given the move to lower inflation volatility).
We like the BTANi-16 in the OATi curve, in ASW and
especially versus EUR breakevens. As written
previously, French linkers will experience much less
negative carry than in Europe and this does not look
priced in at least at the front end (Chart 3).
Admittedly, it is difficult to short EUR breakevens
(outright) in the current market environment of rising
headline inflation – our economists have raised their
HICP forecasts with stronger food, energy and core
inflation by the year-end. Nonetheless, January’s
preliminary HICP data have surprised to the
downside in 5 of the last 8 years and only once to the
upside (Chart 3) – first indications in Germany from
27 January. Meanwhile, upcoming BTPei supply
could help the concession on ‘rich-looking’ EUR
Ch. 1: Commodities, EQ and BEs at Local Highs
Chart 2: Asset Positioning – Less Long than in
November/December Except Commodities
Chart 3: OATei-12/OATi-17 BE versus NY, Oil &
EURUSD: Regression Residuals versus Carry
50
40
30
20
10
0
-10
-20
-30
-40
OATEI12 / OATI17 Breakeven / OIL / EURUSD Residuals
1m Carry
Fwd Carry
-50
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
OATEI12 / OATI17 Breakeven / OIL / E Yield Move Carry Potential?
1m 52.1 -21.4 30.7
2m 17.5 22.2 39.7
3m -18.9 31.2 12.3
4: Watch Out for Downward Jan HICP Surprise
6
5
4
3
2
1
0
Jan uses to suprise
on the downside
jan feb mar apr may jun jul aug sep oct nov dec
All charts source: BNP Paribas, Bloomberg
Below In Line Above
50
40
30
20
10
0
-10
-20
-30
-40
-50
Shahid Ladha / Herve Cros / Sergey Bondarchuk 20 January 2011
Market Mover, Non-Objective Research Section
53
www.GlobalMarkets.bnpparibas.com