Energy prices soared higher and equities fell this week after conflict spread in the Middle East.
Yet price action in European fixed income markets appeared orderly. Bund-swap spreads were contained and there was no sign of a dash for cash.
In places where sharp moves did occur — such as flattening in the euro 10 year versus 30 year swap curve — market participants said the pain had been limited. Those that had held euro long-end steepeners, mostly because of the anticipated impact of Dutch pension fund reforms, had already reduced their positioning.
The pain trade — which in the lexicon of financial markets is the trade that causes the most financial losses to the largest number of investors — was not obvious.
But hunt around and you can usually find at least one corner where positioning has stung market players.
It turned out one such corner was at the front-end of the sterling interest rate curve.
Just a few weeks ago a large US bank had reiterated its recommendation to hold long positions in short-dated Sonia futures, describing it as a low risk, high reward strategy.
A surprise split vote at the Bank of England’s February monetary policy meeting — four members out of nine had unexpectedly voted for a rate cut — had boosted expectations it would cut rates sooner rather than later.
But when energy prices shot higher this week, so did inflationary expectations. The pricing of a rate cut at the March MPC meeting got taken out of the market, and the pace and size of future rate cuts was also revised.
Last Friday, Sonia was forecast to be about 3.2% by early 2027, but two days into this week it was closer to 3.6% — a 40bp repricing in just a couple of trading sessions.
And though short-term interest rate traders might be able to wear off this week's sudden pain, the impact on UK and other households could yet emerge in the form of mortgage rates and consumer confidence.