Commerzbank Eye Tactical Longs

Commerzbank note that "the Bund move clearly lacks conviction with weaker equities and a rallying euro failing to inspire. At least beneath the surface the relentless euro strength is makings its impact felt with inflation break-evens starting to level off from the highest level since February that was reached last week, while real rates are rising. Today's final euro area HICP should suggest that deflation fears are indeed overdone with core inflation at the upper end of the range seen in recent years. Looking further ahead, however, this could change. As the special factors behind last month's surprise increase should reverse in coming months, our economists even think that a negative core HICP print in September is possible. Together with a firm euro / weak dollar and limited upside to real yields, this should also limit the upside in Bund yields. In terms of supply, the market needs to digest the EUR1.5bn tap in DBR Aug50. 30y Bund auctions of this size usually don't cause larger hiccups. In view of the thin summer trading conditions and on the heels of the EUR6bn syndicate tap in this bond last month, however, end-investor demand may still be subdued. With dealers preparing themselves for the Green Bund next month, however, the auction should be absorbed smoothly. Moreover, we also think the bond offers decent absolute value at 30y yields close to 0% and good relative value. 30y spreads vs OATs and the 10-30y box spread are close to the lows since the bond was launched last year while semi-core paper may have to digest some more room-making for the EU issuance wave, which should get rolling next month. Everything considered, we suggest scaling into tactical Bund longs in weakness ahead of today's auction."