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

Inflation: High BEs Ahead of Supply
• GLOBAL: Back at the top for commodities.
• EUR: 4bp premium for the Bundei20.
Chart 1: Net Spec Positions in WTI, SPX, 2y
&10y UST
• USD: 10y TIPS next week.
• GBP: Solid auction & sentiment.
GLOBAL: Commodities and the USD are back at
resistances / support. The big reversal is still not in
the pipeline. The market remains very long WTI and
is flat or short stocks and nominals (Chart 1). As
expected given the small size, supply in the UK and
EZ has been well absorbed but the serious tests are
ahead. France is expected to issue at least EUR 2bn
next week while the US should launch around USD
12bn of TIPS Jan-21. The week after, we expect the
UK to issue a new 50y linker while Italy may have a
window to issue a new linker.
EUR: The EUR 1bn tap of the Bundei20 came out
very well with a 4bp premium at the auction. The
breakeven has managed to stay 2bp above preauction
levels. We find levels of breakeven
expensive versus nominal yield, oil, EURUSD, carry
and EGB spreads. That said, the move is fuelled by
upwards surprises in activity and inflation data and
highlights increasing interest in inflation protection.
We expect issuers to take note and either France or
Italy should issue a new linker in the coming two
weeks. Besides, FRF CPI printed as expected and
the remuneration rate of the French Livret A will be
increased to 2% from 1 February. See last week’s
Inflation Monitor for more details but we do not
expect a significant impact on inflows in the product.
Nevertheless, FRF breakevens are underperforming
too much and are starting to offer (tactical) value
again vs. EUR ones (in ASW as well), especially
ahead of flash estimate at the end of January
(usually weaker than expected).
USD: See article on 10y TIPS.
GBP: A much higher and flatter inflation curve, in line
with our call. The GBP 900mn UKTi-32 was well
received with a bid/cover of 1.97 and premium of
30cents. We stay positive on breakevens but the rich
15-20y sector of the curve should continue
underperforming in real yield and inflation space.
Whilst long front-end cash BEs was our favoured
trade into 2011 (and long 10y RPI swap), the UKTi-
13 BE has already moved up by 45bp! It still looks
cheap vs. our economists' RPI profile but we could
see better entry levels after RPI (BRC shop prices a
tad weak in December but this was very misleading
220
210
200
190
180
170
160
150
140
Chart 2: BTPei19 BE vs BTP/Bund Spread
130
Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11
35
30
25
20
15
10
5
0
-5
-10
-15
-20
BTPEI19 Breakeven
BTPEI19 / BUNDEI20 Nominal Rhs
Chart 3: OBLEI13/OATI13 BE vs NY,
BOBLEI13 / OATI13 Breakeven Residuals
1m Carry
Fwd Carry
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 May-11
BOBLEI13 / OATI13 B Yield Move Carry P&L ?
1m -22.9 5.8 -17.1
2m -33.3 -2.4 -35.7
3m -9.1 -21.0 -30.1
Sources: BNP Paribas, Bloomberg
in November; we expect RPI at +0.73% m/m, 4.8%
y/y) and especially after the large, 0.4y 5y+ linkers
index extension at end-Jan. Further support for 25y+
linkers will come from likely LDI activity, with the 30y
gilt auction next week and an ultra linker syndication
in the last week of January. The latest PPF data
confirmed our expectations of a PF aggregate
surplus at end 2010 - PPF7800 Index +GBB 20bn
from GBP-1bn in Nov. This should allow the real
curve (and nominal curves) to flatten at least on the
15/30y+ segment and the inflation curve to resteepen.
40
60
80
100
120
140
160
180
200
35
30
25
20
15
10
5
0
-5
-10
-15
-20
Herve Cros / Shahid Ladha / Sergey Bondarchuk 13 January 2011
Market Mover, Non-Objective Research Section
46
www.GlobalMarkets.bnpparibas.com