FxWirePro: Derive yields via derivatives on low vols but eventually less ECB QE

We look at how the sensitivity to global yields has changed after the greater reaction in longer-end rates in Japan and the Euro area in recent sell offs. With the BoJ having signaled it is comfortable with a steeper curve beyond its 10Y target, longer dated forward rates have begun to show increased sensitivity to global yields.

Similarly, reduced ECB support and expectations of tapering in 2018 have seen betas of intermediate and long-end German yields rise, but we think the rise in front-end beta will be temporary. By contrast, UK betas have declined since the Brexit vote.

The ECB remains on track to deliver a slightly more hawkish tone in June: hold 30Y Bund shorts and 7s/15s steepener.

Go long 3Mx1Y SONIA as a carry trade.

Maintain 1x2 Jun17 2Y midcurve put spread. We keep a bearish duration bias but with low conviction. Keep tactical shorts in 30Yx10Y gilt forwards into supply.

Hold 10s/30s gilt curve flatteners and long belly 10s/30s/50s gilt fly (50:50). Gilt 1T19 looks cheap ahead of supply. Enter tactical 5Y swap spread narrower and keep 30Y swap spread narrower.

Keep 30s/50s swap spread curve flatteners. Stay long 3Mx10Y gamma. Keep fronts/greens weighted bear steepener.

Elsewhere, we believe that BoJ’s financial stability may be the next theme. Stay long the belly of the 5s/10s/20s 50:50 JGB swap fly.