Halister News

(Bloomberg) -- EUR 3s5s7s IRS fly currently trading about 1.3 sigma below fair value, Commerzbank strategists including Markus Koch write in client note.

• Current fly spreads in EUR stretched across the IRS curve
• Intermediate EUR IRS tenors stuck in a sideways trend with prospects for a major re-pricing remote
• Recommend paying 5y EUR IRS (100%) vs PCA-weighted receiving 3y (58%) and 7y (43%)
  • Deploy PCA-weighting scheme to largely immunise EUR 3s5s7s fly against directional and curve exposure
• Hold tactical longs in HICP breakevens but shift focus to longer-dated Bund breakevens
  • For example, 10y DBRei real yield carry will be +13bp on a 3-mo. horizon
  • While inflation markets are unlikely to follow Draghi’s call for “patience”, strong positive carry and prospects of Fed-induced weakening of EUR limit the downside
• Look to increase duration exposure again at 10y Bund yields above 0.25%
• EUR curve should stay highly directional, an additional steepening impetus should come from the short end where money-market forwards are discounting virtually nothing for June and the small drift lower in Eonia forwards until Sept. could also be realised without another ECB depo cut