€ and $ curves: steepening to make timid return in 2019

In the Eurozone, monetary policy expectations have undergone a significant downward revision. The first 10bp hike is now anticipated in June 2020. In our view, the market underestimates the potential for a hike in the ECB’s key policy rates by end-2020, with a pricing th at appears far too asymmetrical. To profit from this overly aggressive/dovish pricing, we recommend going to pay the June 2020 OIS or entering into a calendar spread on the 3-month OIS (receiving the 9 month forward and paying the 15 month). As regards the € swap curve, it has flattened significantly from 2Y to 10Y, whereas it has steepened from 10Y to 30Y. While we expect the keener risk appetite to lead to a new steepening of the first of these segments over a 9-month horizon, we see the 2Y-10Y starting to flatten at the end of the year, probably at a swifter pace than what is anticipated by the forwards. As regards the 10Y-20Y and 10Y-30Y slopes, we consider that it is more attractive to play a flattening based on the spot value. Turning to the $ swap curve , the outlook is slightly different; as the January FOMC meeting dampened the uncertainty over the Federal Reserve’s monetary policy and unsettl ed the futures curves and volatility surface. We consider that the effects of the Federal Reserve’s balance sheet normalisation are overestimated, but that more flexibility on the Federal Reserve’s part could lead to lower realized volatility.