One of Europe's most popular interest-rate wagers suffered heavy losses last month as global energy price spikes drove a surge in short-term bond yields. Hedge funds and investors clinging to so-called steepeners faced significant losses in September, with the gap between 30-year and 10-year swap rates shrinking from 19 basis points in July to minus 14 basis points. The trade relied on 30-year rates rising faster than 10-year rates, but renewed Middle East conflict and a hawkish message from European Central Bank President Christine Lagarde at the start of September drove up shorter-term yields instead. George Moran, a European macro strategist at RBC Capital Markets, noted there have been "a lot of stop-outs which have amplified the size and speed of the moves." The logic behind the trade was that government bond sales to fund defense spending would hit longer-maturity bonds hardest. Instead, inflation expectations caused by the war in Iran hurt short-maturity notes. In Europe, the Netherlands' €1.6 trillion pension reforms helped make steepeners one of the most-crowded trades last year. The country's move to a defined-contribution system curbed long-dated bond demand. Back in Europe, markets sharply repriced after Lagarde's comments, boosting bets on further monetary-policy tightening. Rodrigo Ostik, head of sterling rates and inflation trading at Natixis CIB, called the September shake-out "a forced unwind." Barclays Bank Plc's Max Kitson said the bank's swap-market positioning indicator is now close to neutral after summer increases.
The September shake-out "felt like a forced unwind," said Rodrigo Ostik, head of sterling rates and inflation trading at Natixis CIB. "The global steepening trade was highly popular with fast money and macro funds." Back in Europe, markets sharply repriced after Lagarde's comments. Expectations for further monetary-policy tightening over the coming year jumped after her remarks, cementing bets on three more hikes by the end of next year. Traders have since boosted wagers even more, and now anticipate as many as four. The adjustment was concentrated at the front end, driving a sharp rise in shorter-dated yields and flattening the curve. Germany's two-year yield has been at the center of the move, climbing to as much as 3.35% at the start of the week from 2.94% at the end of August, as the market reassessed the scope of future ECB tightening.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing