Environment for linkers improving… slightly

Crude oil prices headed higher for much of September, extending the trend under way since August. However, prices did correct sharply right at the end of the month. Nominal yields for sovereigns also trended higher. The yield for the 10-year Bund put on around 30bp between the start of September and 5 October. The yield for the 10-year TNote rose to much the same extent, recovering back above 3%. The VIX camped rather low until the start of October, before surging on account of the selloff that gripped the equity markets. Finally, Eurozone headline inflation accelerated from 2% to 2.1% in September according to the flash estimate, whereas core inflation slowed, pulling back below 1% to 0.9%. In the US, core inflation remained stable at 2.2%. In the UK, inflation accelerated to 2.7% in August, but could well pull back to 2.6% in September on our estimates. Globally, therefore, the determinants of breakeven inflation rates were rather upbeat, at least until the start of October. That is what enabled breakeven for the 10-year Bund€i to progress by around 10bp since the start of September. Breakeven for the 10-year TIPS also rose by 10bp before falling back sharply because of the equity selloff and the weaker-than-expected September inflation data. It is in fact the breakeven for the 10-year index-linked Gilt that posted the sharpest rise, climbing around 20bp. The IOTAs of OAT€i in the 10-year zone did pull back significantly at the end of the period and they are now near their fair value. Those of shorter dated linkers remain cheap. Finally, and as might have been expected, the 10-year breakeven box for the Bund€i-10-year BTP€i has progressed in recent weeks, more particularly in recent trading sessions on account of the posture adopted by the Italian government and the European Commission’s threat to impose sanctions.