The euro curve steepener, which gauges the difference between short and long-dated yields, has been a popular consensus trade that has performed well both before and after US president Donald Trump's 'liberation day' — which is not something that can be said about a lot of other trades this year.
At the long-end of the euro swap curve, where the 10 year versus 30 year differential started 2025 at minus 20bp, the curve subsequently steepened and peaked at about plus 10bp in early June after the 30 year swap rate overtook the 10 year.
But popular can also mean crowded.
And for some, the hawkish rhetoric delivered by European Central Bank president Christine Lagarde after the central bank's monetary policy meeting last week, in which she suggested the rate cutting cycle was almost done, was a reason to reevaluate steepener positioning.
A decreased likelihood of ECB policy rate cuts means shorter-dated yields look less anchored than they once were, or so the argument goes.
Yet, there are plenty of reasons to keep faith in euro steepeners, even as some segments of the curve test multi-year highs.
For one, Largarde may have raised the bar for further easing, but there remain many uncertainties on the horizon — not least, the July 9 deadline on US trade tariffs.
Elsewhere, the ECB’s data dependency when making policy rate decisions means further cuts cannot be ruled out.
At the same time, the path to rate hikes is arguably as distant as ever as the Eurozone grapples with growth and prevaricates towards a capital markets union.
There are also important structural drivers likely to keep longer-dated yields underpinned. Most notably, changes to the hedging requirements of Dutch pension funds are expected to fuel long-end swap steepening over the medium and long term.
There could be wisdom in sticking with the crowd and staying in the euro curve steepener — especially at a time when the Eurozone's economic journey appears far from certain.