HALISTER1: Value in EUR Long-End Mid-Curve Payers on Higher Rates Hedge: SG

Value in EUR Long-End Mid-Curve Payers on Higher Rates Hedge: SG

(Bloomberg) -- See value in EUR mid-curve bear steepeners amid increasing interest in long-term hedges against a scenario of EUR rates eventually moving higher, Societe Generale strategist Adam Kurpeil writes in client note.
  • Buy 1y15y10y payer spread ATMF/+xbp, sell 1y2y3y ATMF payers, PV01-weighted, solve x for zero-cost (Indicative x = 60bps)
    • Attractive rolldown at +10bps/6-mo.
  • Rates rolldown of vanilla payers significantly deteriorates their breakevens, contrary to mid-curve payers in the 15y10y area
  • Risk of unlimited losses at expiry if the EUR 2y3y-15y10y curve bear-flattens, or if 2y3y rate increases in a year’s time by more than 60bps above its 1y forward
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Adam Kurpiel (Societe Generale SA)

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