European Derivatives: Carry trades to lead as volatility retreats

Research evidence excerpt

European Derivatives: Carry trades to lead as volatility retreats

Khagendra Gupta AC (44-20) 7134-0486 Global Markets Strategy J P M O R G A Nkhagendra.x.gupta@jpmorgan.com

J.P. Morgan Securities plc 26 June 2026

Marcus Mayfield (44-20) 3493-8050

marcus.mayfield@jpmorgan.com

J.P. Morgan Securities plc

European Derivatives

Carry trades to lead as volatility retreats

• ECB commentary continues to guide towards further rate hike(s) over the coming

months. We expect a final 25bp hike in September versus current pricing of cumu-

lative 16bp and 24bp of hikes by September and December

• We recommend buying Sep26 Euribor 97.5/97.4375 (2.5%/2.5625%) 1x2 payer

spread at close to flat which benefits from relatively high upper breakeven - around

12-13bp above current levels for Sep26 Euribor

• We continue to recommend carry trades as yields are expected to stay in a range

over the summer weeks. Keep paying the body of the 1Y/1Yx1Y/2Yx1Y €STR fly

as a positive carry trade that also trades as a low-beta bearish duration proxy.

Alternatively, the level- and curve-neutral fly is also attractive on carry and RV

considerations

• Take small profit on Dec26/Dec28 conditional bear flattener and exit fronts/greens

bear flattener at a small loss

• We highlight a few bearish payer spreads on 3Mx(1Yx1Y) which benefit from high

upper breakeven yields and rich payer skew

• The strong negative directionality of the curve versus front-end yields is weaken-

ing, especially in a sell-off. We recommend 2s/10s conditional bear-steepener

implemented via OTM 6M payers; stop out of 2s/10s bull steepener

• Hold 10s/30s steepening bias

• Stay neutral on Schatz spreads and keep tactical widening bias on Bund spreads

on summer seasonality