recommendation for what to Trade :
Going into the CBT decision remain received in the short-end of the curve to position for a more aggressive front-loaded easing cycle than currently priced – even in case of risk-off following a possible Brexit decision.
However, switch from 1Y XCCY receiver (target: 8.80%) into 1Y1Y XCCY receiver (target 8.75% / stop: 9.75%) given a) the recent underperformance in the latter, b) better steady-state return characteristics and c) our view of more permanent improvements on the inflation front in combination with a more gradual US hiking cycling both leaving the door open for low rates for longer.
While short-end outright receiver remain our favorite position we also keep our steepener bias given the risk of an overshooting on the easing front causing medium-term inflation expectation to remain sticky. Instead of a 1Y-5Y XCCY steepener we recommend to position into roll optimized 1Y1Y – 2Y2Y or 1Y1Y – 5Y5Y XCCY steepener (both targets: 50bp).
