###POV. THE EUROPEAN 2-5Y SPREAD. THE...>

BUNDS/CURVE: ###POV. THE EUROPEAN 2-5Y SPREAD. THE DNA OF THE TRADE

- Yesterday, the 2-5Y curve spreads in Germany, France etc. hit their steepest

levels in quite some time (6 months in Germany and 10 months in France).

However, the 2-5Y swap curve spread is now back to its steepest since Mar-14

having hit 52.6bp.

- From an historical perspective, the current 2-5Y spread on the swap curve is

nothing remarkable. Since the start of EMU, the spread has seen a -25bp to 113bp

range and so the spread sits close to the middle of the range. 

- The DNA of the EUR swap curve can usually be gleaned from the 5th and 9th

forward Euribor futures contracts: a simple linear regression of the 2-5Y EUR

swap curve spread against the 5th forward Euribor and 5-9th forward spread has

an R-square of 95% since the start of EMU. In other words, the 2-5Y spread can

be estimated by assessing where Euribor will be in a year and how fast euribor

rises between one and two years. To be precise, 17bp minus 2.6% of the 5th

forward euribor expectation and 97.8% of the 5th-9th forward spread.

- The 2-5Y spread is an ECB-mistake trade: principally the 2020 catch-up.