SWAPS: Citi Still Like EUR Swap Long-End Steepeners

Citi write “€ 10y swap closed yesterday at the cheapest since Wednesday 13-Dec on a day dominated by EGB and SSA issuance.”

• “Since the late December’s trough in € rates, 10s have indeed underperformed on the curve, hurting our two outstanding recommendations (pay €10s30s and receive 2s5s30s 3mF).”
• “It’s not clear to us that supply is the only story here, with Bund and OAT both richer vs €STR OIS this week. A resilient macro backdrop may also be playing a role, corroborating our tactical bearishness.”
• “However, the case for a more sustained selloff does not convince us either: while € duration may show bouts of weakness in the run-up to the first ECB rate cut, the path after it doesn’t seem bullish enough: if the market realised current forward pricing, the underperformance relative to the previous easing cycles would be striking.”
• “The vol market also seems pretty unenthusiastic about the odds of a September/October type sell off over the next three months: gamma vols are actually down since late December despite the rate selloff. We continue to strategically like the belly of the € swap curve against both front- and long-end rates.”