BofA: Pay 1y1y Real Rates In Euro – The ECB Seems To Agree That They’re Too Low

Bank of America write “from time to time we've had differing views from those of the ECB's Isabel Schabel. However, her view that the recent easing in real rates might undermine the ECB's efforts to rein in inflation chimes with our own (rather simpler) view that it looks wrong.”

• “The drop in 1y1y €str since July, coupled with the rise in 1y1y EUR inflation, means that 1y1y real rates - the difference between the two - has fallen quite sharply. The market prices both a sharp easing of real policy rates and stubbornly high above-target inflation.”
• “Those two things sit uncomfortably together. We think they could be resolved through either the market softening its inflation profile (our most likely scenario) or having to defer policy rate cuts. We would pay 1y1y real rates. It's unlikely perhaps, but If the ECB were to voice its displeasure with real rates where they are, that would benefit the trade today.”