European Inflation Numbers, Global Bond Yields

Yesterday’s price action. Eurozone 5y5y inflation jumped to a fresh 11-month high of 1.63% yesterday on the back of the spike in commodity prices. Nonetheless, 10yr Bunds ended the day little changed at 0.27%. 1y1y EONIA wasn’t impressed either, ending the tight correlation seen since the beginning of October. Standing out spreadwise was the underperformance of Spain, which indeed looks rich in RV. By contrast, PGBs tightened 14bp versus 10yr Bunds, as markets priced in Wednesday’s tap of the PGB 3.85 4/21 (as announced last Friday) rather than of the 10yr. This caused the 5s10s to flatten some 13bp after hitting a year high of 162bp on Friday. Also noteworthy was the underperformance of OATs versus OLOs, with the 10yr OAT/OLO spread rising to the widest level of the year (i.e. 3bp) after markets digested the final OLO auction of 2016. This may be related to the emergence of ex-prime minister Francois Fillon as the frontrunner in the first round of presidential primary voting among center-right candidates. Indeed, while polls have consistently shown Alain Juppe, who came in second, would beat Front National’s Le Pen, there are fewer polls on how Fillon would fare in such a stand up. In fact, a BVA poll from September showed Fillon had a smaller lead over Le Pen than Juppe.

ECB QE leaning against the wind. The weekly QE data released yesterday showed that the Eurosystem has remained a strong buyer throughout the bond market sell-off. PSPP purchases amounted to €17.8bn in the five days to 16 November, which is the highest weekly reading since mid-October. Overall asset purchases over the past week stood at €21.3bn, the highest level since June. EGB supply. Today Finland will tap the RFGB 9/23 by up to €1bn. It is the first reopening of the bond since its launch in late summer with an inaugural size of €3bn. And it is also set to be the last primary market activity of Finland for 2016. The bond trades at a pick-up of 9.5bp versus the NETHER 7/23 in z spreads, which is at the upper end of the range since launch. In general RFGBs have been under modest widening pressure versus NETHER since September having gradually underperformed around 3bp since then.