The Rates Gambler - EUR #8

ECB Cuts Done (?) — The Downside’s No Secret

Good morning folks,

This piece is being written on the 5th of June, 2025, around 5 PM Lisbon time. Prices are taken as of that time.

Today is NFP day, so we’re expecting turbo markets. I’m not particularly good at trading events, so I’ll simply watch the numbers and eventually adjust my positions if needed.

With that said, today’s focus is on taking some risk in European rates. Yesterday was quite interesting, as we’re now opening up to multiple scenarios. We’re currently sitting at 2%, and I believe the ECB is largely done with cuts. I see significant upside risk for rates and room for repricing from here.

Looking at the curve, we’ve been pricing in a terminal rate below the ECB’s estimated floor—somewhere between 1.75% and 2.25%—so we’re exposed to potential growth-driven repricing to the upside. While everyone talks about trade wars and uncertainty (blah blah), a trade deal could still materialize, which would support growth. Looking at PMIs, they’re not that bad after all.

Moreover, Lagarde’s endorsement of fiscal spending during her speech sounded like a green light from the ECB to push forward with measures that support growth and keep inflation around 2% over the medium term. To me, it came across as: “OK folks, rates can stay where they are, but now go spend money to support the economy.” That’s my take, and it leads to a few possible trade ideas:

• The clean trade: Bet on no further ECB cuts this year. That means going short outright ERZ5.

• 2s10s steepeners: This trade has been painful for me, but I still find it compelling. Growth projections could be revised higher, and sentiment is deeply pessimistic. There’s potential for repricing a “fiscal risk premium” in holding 10-year bonds in Europe.

• Peripheral compression: Fiscal spending remains supportive for the periphery, potentially allowing spreads versus Bunds to compress further as these economies outperform.

To be honest, none of this is brand new. But yesterday my gut said, “We’re pricing peak dovishness—we need to reprice something.” In the end, macro remains uncertain, and we can trade the swings. Now might be the time to start pricing in higher rates in the EUR complex.

Let’s see what NFP brings. I’m flying to Italy for the weekend—time to enjoy the mountains.

Take care,
spaghettilisbon