Sell SPGB 3.15% 04/33, Buy SPGB 1.90% 10/52, Sell DBR 1.70% 08/2032 (ctd RX futures Sept-contract) and Buy BKO 2.80% 06/25 (ctd DU futures Sept-contract): currently trading at 118.6bp, target 105bp (stop loss 128bp).
In our view, in the European sovereigns’ space the 10Y area looks rich vs. the fly 2Y and 30Y. Therefore, we suggest to jointly trade a pause in the flattening (inversion) of the German 2Y-10Y and the steepening in the Spanish 10Y-30Y area. As the figures below show, the combination of these two trades is now at the maximum historical level, having selected the two most inverted and steepened curves, the German and the Spanish ones respectively.
Under the hypothesis that the ECB is approaching the end/pause in its tightening cycle in terms of hiking interest rates (from a market expectations perspective it is of course confirmed if one looks at the difference between the implicit forward EUR rates in 12Y vs. 3 months), the current level of the box SP 10Y-30Y vs. GER 2Y-10Y looks too high.