Morning from Europe.

The sharp curve steepening seen yesterday is interesting as it rhymes with actual reflation.

As we wrote last week, there was blood on the street in steepener bets due to the repricing of the front end of the USD curve through Q1. We stayed in the 2s10s steepener and continue to see good reasons for strong performance until mid-summer.

The steepener typically works when the economy reflates on the back of a land-slide in input costs paired with expectations of rate cuts. Input costs dropped 50% for necessities until mid-2023, which is one the main reasons why the cycle is now improving in Manufacturing again and also one of the main reasons why the Fed dared to pivot in Q4.

But.. There is also a certain “last chance saloon” vibe over the current reflation trend as it hinges on the continued increasing term premias from rising oil prices.

Chart 1: Steeper curve because of lower input costs last year