Citi Eye Move Lower In Real Yields

Citi note that “Monday’s initial response in rates to rising geopolitical tension in the Middle East was relatively small, before extending. Although it is early days (with significant tail risks), and the return of U.S. market participants today may give a better read.”

• “There are two obvious potential implications for rates re: the conflict: (1) it raises inflation uncertainty via higher oil prices (2) it may boost ‘flight-to-safety’ premium in core rates, which has been diminished recently by global bond supply worries, and add to growth concerns.”
• “Both could impact EUR real yields, which have spiked as the exact opposite dynamic (lower inflation/higher nominal yields) has dominated of late.”
• “Regardless, we felt the rise in EUR real yields looked a tactical fade, not least as any further sell-off would likely bring out ECB protests given over-tightening risk.”
• “It was a Fed warning along those lines that significantly extended the duration rally yesterday afternoon/evening.”
• “In our latest weekly, we entered a long in 10yr EUR real yield swaps synthetically to capture the idea that the market had gone too far too fast (and were encouraged by Friday’s payrolls reaction). It could now find some additional support due to the Middle East turmoil and geopolitical tail risks.”