Wednesday, June 4, 2014

Rates: Preparing for An ECB Disappointment!

EUR 5s10s slope in swaps is too steep

Comparing EUR with all other CCY 2s5s10s fly is trading at a too high level. Even with own history, it is trading at all time high (see below). At the same time compared to JPY, the 5s10s30s too flat.

On top in recent time, the beta of 5y to change in 10y swap has been highly assymetric for large moves (see below)

The trades are

#1: Pay belly in 2s5s10s in EUR
#2: Pay belly in 2s5s10s in EUR vs receive belly in 5s10s30s

Will work good in case of a disappointment. And downside should not be great in case of expected actions. Now a shock and awe from Mr Draghi is a different matter. So preparing for an ECB disappointment is not a bad strategy, given - a) the amount of expectation and b) history of ECB

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