Rates Spark: Up And Down With Oil

Euro rates continue to swing up and down as oil prices react to Middle East headlines, but overall, the moves are well-behaved. Brent oil is oscillating around $100 per barrel, keeping the 10Y euro swap rate close to 3.0%. The front end of the curve is also following the usual script tightly, with every $10 move higher in oil amounting to around 20bp of additional European Central Bank tightening being priced, and vice versa. Whilst we think growth concerns should start playing a more important role in driving rates, markets don't seem worried so far, given global equities are still testing record highs.

Falling implied volatilities also suggest euro rate markets are quite content to stick around current rate levels. The three-month ahead implied volatility for the 10Y swap has come down further and is close to its lows from last month. The lower volatility measures suggest markets are not expecting a radical change from the current environment. And we tend to agree. Even if a deal is struck, oil prices are unlikely to come down by a significant amount. Also, a significant re-escalation does not seem a likely path going forward.

A relatively light day in terms of data. From the US, we have weekly mortgage application data and the Richmond Fed manufacturing indices for May. Consensus pencils in a slight improvement from 3 to 4 for the headline index.

In terms of supply, Spain will proceed with a syndication of a new 10y SPGB with an estimated size of €13bn. The UK will auction £4bn of 7y gilts, while Germany will auction a combined €2bn across 15y and 30y Bunds. In the US, issuance includes a $28bn 2y FRN and a $70bn new 5y note.

MENAFN27052026000222011065ID1111172559