Halister News

(Bloomberg) -- Probable skewness of EUR IRS moves in the aftermath of the Brexit referendum argues for a conditional set-up to capitalize on a bearish kneejerk reaction led by 10y IRS, Commerzbank strategist Markus Koch writes in client note.

• Buy EUR 1m10y ATM payers vs EUR 1m20y OTM payers at zero cost
• 10s20s is still trading more than one sigma wide relative to fair value, thereby largely limiting risks of a still steeper curve while fast money will unwind respective hedges in the 10s instantaneously
• On expiry, the spread should trade up to 15bp tighter, led by the 10y tail
• Steep curve in the gamma grid renders the sale of vol in long vs short tails fairly attractive
• Risk: curve could also bear steepen judging by historical patterns, hence resulting in a loss if the cushion from the vol intake is exceeded
• Conversely, the zero-cost payer position would expire worthless in case of a Brexit, driving EUR IRS to still lower levels
• In sum, investors are limiting the downside to PnL while fully capitalizing on a Bremain outcome