Global Rates: Thoughts on long end EUR curve, SSAs and the recent Riksbank and Norges Bank meetings

Francis Diamond (0:03)

Hi, and welcome to At Any Rate, JP. Morgan's Global Research Podcast Series, where we take a look at some of the drivers behind the biggest trends and themes across fixed income currencies and commodity markets.

I'm Francis Diamond, Head of European Trade Strategy at JP. Morgan, and today I'm joined by colleagues Khagendra Gupta, Matteo Mamprin to discuss recent dynamics at the long end of the Euro curve, our latest views on SSAs, and the recent Riksbank and Norges Bank meetings. This week, so if we start with the Euro curve and particularly at the long end, the 1030s Euro swap curve has seen a lot of investor focus over the past few weeks. We've seen substantial flattening. The curve is now at its flattest level since last March. So Khagendra, how do you explain this move? Is this technical driven? Is it a function of yield moves? And how does it stack up if we look at what's been going on historically with this sector?

Khagendra Gupta (0:55)

Hi, Francis. Yes, you're right. The flattening of the 1030s Euro curve has been especially severe over the last few days. Now, before I dive into the drivers, as you asked, I think a little backstory is relevant and important here. Now, the 1030s steepener has been a very desirable trade for investors over the past couple of years.

The curve had steepened about 50 basis point, if you remember, over the course of 2025 Now, interest in this trade was basically driven by expectations of unwinding of flows from the upcoming Dutch Pension Fund transition. The estimates of these unwinding flows coming from the funds ranged widely over the course of 2025

Everyone wanted to be in this trade and in some form or the other, as the transition was definitely was definite.

And I should remind our listeners that steepness were also positive carry trades. So they didn't really hurt to hold, the fields did not move, you're just lighting up a curve. However, as we entered 2026, the actual flows related to the transition were realizing towards the low end of expectations. Nevertheless, in my view, the positive carry kept investors interested. And the fact that ECB was also, the terminal rates in ECB was pricing them for the reduction over the course of 2026 However, since the US Iran war started in early March, ECB terminal rates have sharply repriced higher, leading to a significant overall bear flattening of the curve. 1030 steepeners have suffered a lot. They suffered a lot in March, April, coming down from, let's say, plus 30 basis point in January, February, to low teens to a high single digit by the end of April, early May. However, over the past few weeks, as one year, one year ester, or you can say that as a proxy for ECB, terminal pricing has marched even higher as the ECB has delivered hikes, other central banks have done hawkish, and energy prices have increased further. This has led to market pricing even higher rates for longer.

This has, in my view, led to significant position unwinding over the last few days and that has pushed 1030s back towards minus 20s level or around let's say 50 basis point round trip back to levels of early 2025

Overall, I think the primary driver has been the move higher in one year, one year rates. Now, interestingly, we compare the evolution of 1030s currently versus the past ECB hiking cycles. We find that the current behavior is not really out of sync with those prior cycles. The range observed in 1030s now is close to the historical averages of the ranges, how much 1030s have traversed in the past hiking cycles. The directionality of the curve versus one year, one year is now strong and negative, and it's again in line with prior cycles. I do want to highlight that the beta of this in the simple one-factor relationship is now a bit higher relative to past that is more negative compared to past cycles, and that could be explained in my video to heavy positioning that was prevalent going into this year. So from a historical perspective, the moves are not really out of ordinary in my view.

Francis Diamond (4:28)

Okay, so there's clearly a macro and sort of ECB dynamic there. So how do you expect the curve to behave going forward given this macro driver and still this technical backdrop?

Khagendra Gupta (4:40)

Yeah, as I mentioned, and as you correctly point out, the volatility of the terminal rate pricing, which will remain the primary driver of the curve, it has been like that for the past few months and I think it will continue on for the next several weeks at least.