EU Rates higher on oil, caught by the referendum
The OPEC decision to cut oil output for the first time in eight years has sent oil prices higher and with it government bond yields. In the US, where additionally the ADP report hinted at a strong US labour market report tomorrow, 10yr UST yields rose almost 10bp and briefly revisited the recent highs at 2.40%. This has pushed the 10yr UST Bund spread to new long term highs of 213bp. Earlier in the day the Eurozone inflation flash estimate had been less inspiring. Headline inflation rose to 0.6% in November, but core inflation held steady at 0.8%. The EUR 5y5y inflation forward did increase on the day, but it hasn’t topped the range around 1.60% that has prevailed since the start of last week. While sentiment has remained constructive, political risk factors in the Eurozone and a potential prolonging of €QE still capped the 10yr Bund yield at 0.28%. EGB spreads vs. Bunds tightened slightly, a show of confidence especially for BTPs after already tightening 13bp the day before. The focus today will be on the bond taps out of France and Spain, also as a further gauge of sentiment ahead of the Italian constitutional referendum this weekend. EGB Supply: Spain will reopen the 5yr SPGB 7/21, 10yr SPGB 10/26 and off-the-run SPGB 7/41 for a total of €2-3bn as well as the linker SPGBei 11/19 for €0.25-0.75bn. The US election outcome and Italian spill-overs had pushed the 10yr spread over Bunds some 30bp wider, but levels have stabilized since mid-November suggesting much has been priced in already in terms of risks. This counts for BTPs especially against which SPGBs still look rich despite some recent cheapening. France will reopen the 15yr benchmark FRTR 5/31 and FRTR 4/41 for a total of €2.5- 3.5bn. Both bonds trade special in repo, in particular the off-the-run bond. The 4/41 was last reopened in July this year and has cheapened slightly into the auction against surrounding bonds. The sell-off in bond markets has taken the z-spreads to the widest level since end-Q1, but the starkest cheapening was seen versus Bunds and OLOs. The FRTR 5/31 trades at 10bp vs. the BGB 6/31, up from close to flat in mid-November.