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Houses Pitch Trades Around Steep Short-Term Euro Curve

18 May 2003

Derivatives houses, including Citigroup, Barclays Capital and Deutsche Bank, are pitching receiver trades that take advantage of the steep euro yield curve between the three-month and the four-year portion. Many hedge fund accounts have already taken advantage of this steep curve and have scooped up such trades as two year into two year receiver options, in which the investor enters an option to receive two-year fixed and pays floating, said Jean Dumas, head of European relative value research at Deutsche Bank in London.

Strategists explained that buying receivers at, or longer than, the two-year maturity gives the investor a positive carry as the trade rolls down the curve. Rory Byrne, European fixed income strategies at Citigroup, said the forward curve is predicting that rates will go up in 12 months, so if an investor believes that rates will continue to rally, it is a good trade. Byrne noted that these trades are also inexpensive to purchase because implied volatility has fallen since the end of the Iraqi war.

Anthony O'Brien, associate director in interest rate strategy at Barclays Capital in London, said the firm is now pitching a euro three year into a one year at-the-money receiver swaption because the roll down has been reduced in the two-year portion of the curve and the three-year forward is near its historical highs. He added that front end of the curve should remain steep as Barclays is expecting the European Central Bank to cut interest rates by 50 basis points by June as consumer and business confidence continue to fall in Europe.

18 May 2003