Halister News

(Bloomberg) -- Value of euro-zone inflation instruments as a means of diversification and inflation protection remains high, HSBC strategist Theologis Chapsalis writes in client note.

• Since the March ECB meeting, the 5y5y inflation swap has actually fallen, even though oil prices have risen modestly
• Despite a comprehensive set of ECB easing measures, market participants were left unimpressed and failed to increase medium- to long-term inflation expectations due to:
  • Carry was prohibitively negative until the end of March, deterring longs
  • Easing was accompanied by a strengthening in EUR
  • Investor community is coming firmly around to the belief that the softness in euro-zone core inflation is more than transient
• Recommend reducing long TIPS breakeven positions, especially as core U.S. CPI is likely to slow down in coming months
• Favor USD 5s10s breakeven steepeners given the shape of the breakeven curve and the upcoming supply
  • Unless Brent rises back to around $60, the current flatness of the slope isn’t sustainable