European Derivatives: A mid-summer skirmish: proxy long duration and carry

Research evidence excerpt

European Derivatives: A mid-summer skirmish: proxy long duration and carry

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 10 July 2026

Marcus Mayfield (44-20) 3493-8050

marcus.mayfield@jpmorgan.com

J.P. Morgan Securities plc

European Derivatives

A mid-summer skirmish: proxy long duration and carry

• We continue to expect the ECB to deliver one additional 25bp hike in September

and the €STR curve to price some term premium further out. However, the peak

pricing of around 39bp of cumulative hikes by June/July 2027 is a few bps too high.

We have a bullish duration bias at the front-end

• We expect 1Yx1Y €STR to trade in a (2.40% - 2.60%) range versus the current level

of around 2.57%. We recommend buying 3Mx(1Yx1Y) A/A-20bp receiver spread

funded by selling around A+25bp payer. Richer payer skew enables us to enter this

trade at zero cost

• Hold carry trades via paying the body of the 1Y/1Yx1Y/2Yx1Y 50:50 €STR fly

• The directionality of the 2s/10s curve is shifting to the long-end; hold 2s/10s condi-

tional bear steepener via 6M OTM payers

• We have a steepening bias on 10s/30s which is essentially a bullish duration proxy.

Enter 2Yx2Y/10Yx10Y swap curve steepener which exhibits a strong correlation

to 10s/30s, offers broadly similar beta-adjusted carry, and is trading 3bp too flat

on a regression basis

• Buy Mar27 ATM Euribor call versus selling 12.5bp OTM SOFR calls to position

for Euribor outperformance in a rally. The trade benefits from lower Euribor vola-

tility allowing us to enter the trade at a small net credit

• German swap spreads have remained in a tight range. News flow around the ECB

potentially doubling the MRR requirement from 1% to 2% led to some temporary