Average entry 0.99%, target @ 0.60%, stop @ 1.21%, roll-down +10bp in 3M.
First ½ position was opened @ 0.925% on 4 June (see Trade Recommendation: EUR – receive 1Y swaps, 2Y forward).
Close ½ position of pay 2Y-5Y-10Y EUR fly, 6M forward (pay belly, receive wings). We book 6bp of profit on a half position.
Momentum has turned at the front end of EUR swap curve
Since Mario Draghi cut the refi rate to 0.50% in early May and signalled that negative deposit rates were still an option, rates in EUR swaps and money markets have moved significantly higher. Key drivers have been (1) Draghi’s more hawkish appearance at the June ECB meeting, (2) the ongoing decline in excess liquidity amid small improvements in EUR data and (3) the sell-off at the long-end of the US curve.
Our ½ position to receive EUR 2Y 1Y has faced some headwinds but as the markets appear to be stabilising after the wash out, we feel confident about scaling up to a full position.
Book profit on pay belly, receive wings of 2-5-10 fly 6M forward
On March 8, we opened a trade recommendation (Trade Recommendation: Pay 2Y-5Y- 10Y EUR fly, 6M forward, 8 March) in anticipation of the 2-5 slope steepening and the 5-10 slope flattening. Although the fundamental reason for the 5Y underperformance has not been anticipation of European growth (as we argued in March), the trade has benefited from the US-driven sell-off. As we see the increase in the EUR rate as a bit overdone, we close this trade and book a 6bp profit on a half position.
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