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ECB today has maintained status quo in its monetary policy, keeping minimum bid rate unchanged at 0.00% which was widely expected. In upcoming ECB press conference, with no policy change, market players are focusing on how President Draghi may alter its economic assessment and policy guidance.
The central bank this week has kept money market steepener as the removal of the downside risk of growth and of optionality for lower rates and larger QE will be a small step towards normalization.
We expect a mildly bearish reaction to our baseline ECB scenario of removal of all biases next week. Hold 30Y short and 7s/15s steepener in Germany.
Carry efficient bearish proxy: short body in 2s/5s/10s fly. An early election in Italy appears likely: keep carry efficient proxies for Italy underperformance.
Be generally defensive in core spreads. Open 10Y+ Belgium short vs. France and/or Ireland. Keep Jun18/Sep18 and Dec17/Dec19 ECB OIS curve steepeners. Sell Sep19 in the Sep18/Sep19/Sep20 50:50 Euribor fly. Favor paying 5Yx5Y vs. surrounding 2Y and 3Y forwards.
Conditional trades: roll 2s/10s swap curve into Schatz/Bund weighted bear steepener and initiate 2s/5s/10s bear belly cheapener via 6M payers. Take profit on Sep17 Schatz OIS swap spread outright widener and close Jun17 Schatz/Bund OIS swap spread curve flattener. Take profit on Jul17 Bund conditional bull widener but initiate conditional bear narrower. Close receiving Jun17 Bobl swap spread in the Schatz/Bobl/Bund swap spread fly.
Stay short 112.2/112.1 Aug17 unhedged Schatz strange. Hold short in 6Mx10Y straddle vs 1Yx10Y as a short gamma / long vega strategy. Initiate Schatz/Bund vol curve steepener.
