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I am currently reading the book "Interest Rate Swap and other Derivatives by Howard Corb", in Chapter 8.2 Curve Trades, it mentioned:

"Investors believes Fed is going to lowering the Fed Fund rate, ..., the investor may believe that the front end of the curve will likely rally as unanticipated rate cuts become known to the market and that the back end of the curve will likely sell-off as the market comes to grips with the longer-term risk of inflation. The investor may want to express this view by entering into a 2s10s steepener".

I don't understand here why the swap rate will rally at the front end? If the Fed Fund rate decreases, there will be more money available in the market, shouldn't the swap rate decrease? And do people start selling off the longer end because of the fed fund rate decrease? why the same action of Fed resulting a different reaction on the different points of the swap curve?

And also if the front end rallies and back end decreases, shouldn't the spread between 2s10s narrow? since the 5Y swap rate is always higher than the 2Y swap rate. Then why it's a 2s10s steepener here?

Are there any other books that cover a similar topic?

Thanks!

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    $\begingroup$ In Fixed Income jargon, “rally” and “sell-off” refer to bonds, so if the market rally it means bond prices go up and rates go down. $\endgroup$ Sep 7, 2021 at 0:32

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