J.P.Morgan Pay The Belly 2-/5-/7-Year Swap Fly

Late Thursday saw J.P.Morgan note that “the swap curve has moved in pretty extreme fashion and appears to be racing toward an easing cycle dynamic, but with an already very flat curve. We do not expect easing, but 3s/5s and 3s/10s are flat relative to 2011, which increases scope for steepening even on a tapering of hikes. Finally, AUD 10-Year spreads to dollars are still comparatively wide, on regression to front-end spreads. In 2011, the Fed was anchored at the ELB and double dip recession fears were prominent, limiting scope for global steepening. Conditions are not too different today, with most scope for higher yields coming via steepening in Z2/Z3 Eurodollars, more so than further out. In this context of bounded U.S. 2s/10s, and still-wide 10-Year spreads to USD, any release to higher AUD yields on the rough template of 2011 should in our view be concentrated in the 5-Year sector. We pay the belly of AUD 2s/5s/7s IRS at -7.1bp.”