Bank of America favors receiving forward real yield from 2031 to 2040

Investing.com -- Bank of America has issued a recommendation to receive the forward real yield from 2031 to 2040 in OATei at 2.5%, citing level, roll-down and July rebalancing factors.

The bank continues to favor "beta breakeven" longs, noting that forward real rates remain high while forward inflation stays subdued at ECB target-consistent levels.

Bank of America analysts point out that 1y5y Euribor stands at 2.91%, which is 9 basis points higher than spot 5y Euribor at 2.82%. However, this masks significant opposing movements in 5y inflation and real rates. The 5y inflation is priced to decline 24 basis points to 2.00%, while 5y real rates are expected to increase by 32 basis points to 0.91%.

A 1y5y ATM Euribor payer swaption carries a value of 29 basis points. The bank suggests going long 1y5y inflation while selling 1y5y payers, which would provide the inflation long a downside cushion to 171 basis points if not exercised, or convert the trade into a received real rate position at 120 basis points including premium if exercised.

Bank of America notes that examining the composition of the €str curve changes since end-February reveals that the inflation component represents a substantial portion of the movement at the front end of the curve, but shows minimal persistence further out.

The bank observes that the significant rise in forward real rates contrasts with typical stagflation responses, which would generally feature rising inflation expectations alongside falling real yields.

Bank of America maintains a bullish stance on Euro rates, particularly 10-year Bunds, and remains constructive on real forwards, with OATei as the preferred expression.

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