Bank of America has advised investors to receive the forward real yield in the 2031-2040 OATei series at 2.5%, citing the level of the curve, expected roll-down benefits and the prospect of portfolio rebalancing in July as drivers behind the recommendation.
The bank continues to lean toward "beta breakeven" long positions on inflation, arguing that forward real rates are elevated while forward inflation remains subdued at levels consistent with the European Central Bank's target. That combination, the analysts say, supports taking a received real yield stance in OATei for the stated horizon.
Bank of America highlights the 1y5y Euribor measure at 2.91%, which sits 9 basis points above spot 5y Euribor quoted at 2.82%. The bank cautions, however, that this single spread conceals meaningful offsetting movements in the inflation and real-rate components embedded in the 5-year horizon. Specifically, markets price 5y inflation to fall by 24 basis points to 2.00%, while 5y real rates are projected to rise 32 basis points to 0.91%.
On optionality, a 1y5y at-the-money Euribor payer swaption is valued at 29 basis points. Bank of America proposes a package trade: go long 1y5y inflation and sell 1y5y payers. According to the bank's analysis, this structure gives the inflation-long a downside cushion to 171 basis points if the option is not exercised, or, should exercise occur, converts the position into a received real rate exposure at 120 basis points after accounting for the premium.
Examining changes in the €str curve composition since the end of February, Bank of America observes that movements at the front end of the curve have been driven to a large extent by the inflation component, while that component shows little persistence further along the curve. The bank views the pronounced rise in forward real rates as atypical relative to a stagflation scenario, which would generally feature rising inflation expectations coupled with falling real yields.
Overall, Bank of America remains constructive on euro area rates, with particular bullishness toward 10-year Bunds, and expresses a favorable view on real forwards. For implementing that stance, the bank singles out OATei as its preferred instrument.
Summary - Bank of America recommends receiving the 2031-2040 forward real yield in OATei at 2.5%, prefers beta breakeven inflation longs while selling payers, and notes a split between rising forward real rates and subdued forward inflation. The bank is constructive on euro rates, especially 10-year Bunds, and favors OATei as the vehicle for real-forward exposure.