Inflation Strategist: Sun shines on EUR real curve flatteners

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Inflation Strategist: Sun shines on EUR real curve flatteners

US TIPS

Meghan Swiber, CFA Stephen Juneau

BofAS BofAS

• Risks around elevated oil, supply chain disruptions, and AI suggest still room for

front-end inflation to reprice higher

• We recommend a 1y2y inflation curve flattener to trade higher inflation & risk asset

correction mix; for those less worried about equity downside, we recommend long

2y inflation swap

Inflation vs equities: 1, 2 step

Positioning has shifted sharply over the past three months. Risk assets have rallied

through the rate selloff even as inflation risks have built. Investors are broadly short

duration, with low vol and solid fundamentals supporting spread products. We stick with

that bias and are short 2y nominals ( see: Chair lift) and long credit ( see: Agg Alpha).

The key risk is a mismatch—further inflation upside alongside risk asset downside. We

recommend a 1y2y inflation flattener, supported by oil risk and supply chain pressures,

and cross-market pricing. For those not hedging equity downside, we prefer simply being

long 2y inflation. Forwards reflect a sharp retreat in inflation swaps, largely due to base

effects but incremental upside to oil may slow that inflection (Exhibit 1).

Exhibit 1: 1y inflation swap and oil prices

1y inflation swap priced to decline largely due to base effects; our commodities team forecasts oil

modestly above forwards

130 4.15 CL1 Comdty BofA quarterly forecast 1y inflation swap (RHS)

110 3.55

2.95

2.35 60

40 1.75

Dec-25 Feb-26 Apr-26 Jun-26 Aug-26 Oct-26 Dec-26

Source: BofA Global Research, Bloomberg; dashed lines are projected from forward pricing

BofA GLOBAL RESEARCH

Econ forecasts for higher 1y vs 1y1y inflation

We expect headline inflation to peak at 4.6% before falling to 3% by Q1 ‘27 and then 2%