As ECB keeps maintaining negative rate strategy and active asset purchase programme, we advocated rates strategy as follows in our recent write up:
“Buying EUR 2y5y ATMF payers vs selling 1y1y5y ATMF mid-curve payers (same strike, same notional)”.
The “low for long” theme is back as rally in risk assets is running out of steam.
Persistently low global growth and inflation requires durably accommodative monetary policies. Risks such as, 45% risk of Brexit, Negative rates have a dark side and Europe has only limited fiscal rooms are revolving around euro’s growth.
So, both EUR rates and rates volatility are close to historical lows – and priced to remain so (see above chart).
Current levels are attractive to set up hedges against a scenario of eventually higher rates in one or two years time.
Risks: Limited over the next 1y, path dependent and unlimited longer term
Until the expiry of the 1y1y5y option, the strategy is short gamma, but the mark-to-market risk is limited to the premium paid.
Longer term, there is a risk of unlimited losses if rates increase sharply in a year's time and then decrease back below the 2y5y ATMF strike.
The material has been provided by InstaForex Company – www.instaforex.com