Steepeners: turns out we can all be right

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Steepeners: turns out we can all be right

Colleagues and friends. business colleagues in the office.

Trading rule 101 says beware of overcrowded positions but some rules are meant to be broken

A consensus trade where every player from hedge funds to fund managers is positioned the same way is just asking for trouble, or so trading rule 101 will tell you.

But when it comes to steepeners this year, it turns out that we can all be right and for quite some time.

The curve steepener, which gauges the difference between short and long-dated yields, has been a popular trade that has performed both before and after US president Donald Trump's tariff revelations on April 2 — which is not something that can be said about a lot of other trades this year.

A strong dose of fiscal expansion, and some political pressure to keep rates lower, has led to yield curves steepening across the globe, from US Treasury dealers in Connecticut to Japanese government bond traders in Roppongi Hills.

In Tokyo, where some have been waiting for 30 years for a JGB sell-off, the trade has finally delivered. After a decades long wait, and possibly some career defining moments, shorting JGBs is no longer the widow-maker trade.

And while fiscal expansion has been a driver of the global curve steepening trend, other factors have had an influence too.

In Europe, there are important structural drivers that have kept longer-dated yields underpinned.

Most notably, reforms to Dutch pension funds — which will see them transition from being defined benefit to defined contribution schemes — has fuelled steepening momentum in the euro swap curve.

So far, there has been wisdom in sticking with the crowd and staying in the steepener — especially at a time when the economic journey appears far from certain.

But August is a notorious time for illiquidity and outsized market moves. A smart market player would be wise to take her chips off the table and leave the party early before things get messy.

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