Long-term hedge against higher rates: ECB is scheduled to deliver monetary policy on 8th September, as EUR long rates have drifted lower and the yield curve has flattened, there is increasing interest in long-term hedges against a scenario of rates eventually moving higher. EUR short and intermediate rates should remain anchored by durably low ECB key policy rate and 4y maturity TLTRO II.

On the other hand, ongoing euro area recovery, increasing headline inflation in the coming months and progressive loosening of the fiscal policy should provide some incentive to protect against a sell-off at the long end of the curve.

EUR long rates are also still being influenced by global factors: any UST sell-off triggered by a hawkish re-pricing of Fed expectations would drive EUR long rates higher, bear steepening the EUR swap curve.

Zero-cost proxy for 1y expiry EUR 3-7y bear-steepener:

Zero-cost proxies for conditional bear steepeners have for long been our preferred hedge against rising rates. The idea is to finance payer spreads in long-maturity rates by selling payers in short or intermediate tails.

The execution:

Buy €50m 1y7y payer ATM

Sell €50m 1y7y payer ATM+35bp

Sell €115m 1y3y payer ATM.