The main rationale for the trade is a possible positive surprise of the European economy by the end of the year. The periphery has performed well and the recent resolution of the Berlusconi’s issue has reduced the political risk of the area. Moreover, the economic performances outline the beginning of a recovery path: Italy PMI grew from 44 to 50.5 in the last 8 months and in Q2 Germany was the country that grew the most among the developed countries. We believe that there is no enough grow priced in the 10y rate that usually tends to rise when there is expectation of stronger economic performance.

With regard to UK, probably there is too much growth priced in the rates. The country has showed good sign of recovery but the performance are still poor compared to the previous run of growth quarters. Moreover, the stance of the BoE is still dovish and a rate hike appears to be unlikely. Finally, the unemployment rate set by the forward guidance of Mr. Carney is harder than the markets expects to be reached as the UK labour market is really sticky; this fact will keep an accommodative policy for a longer period of time.

Paying 10 y EUR means paying fixed rate in fix to floating swap rate based on the Euribor. Receive 10y UK means the opposite with the LIBOR as a reference rate. The first position appreciates as the rate goes up, in the second you make money when the 10y rate goes down.

Entry: 62 bps

Target: 25 bps

Stop-loss: 85 bps

Time horizon: 6 weeks


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