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I am considering the carry profile of a 3M forward 5s/30s swap curve steepener in a pre-easing environment (pre fed rate cut). Basically, in 3 months, I will enter into two different swaps:

(1) A swap in which I receive the current 3M forward 5yr swap rate (and pay the relevant floating rate)

(2) A swap in which I pay the current 3M forward 30yr swap rate (and receive the relevant floating rate)

So long as the spot 5yr/30yr curve is steeper than the current 3M forward 5yr/30yr curve, the value of my position increases (i.e. I accrue carry). E.g. if the 3M forward 30yr yield increases more than does the 3M forward 5yr yield, then I gain more on my 30yr swap than I lose on my 5yr swap.

My question concerns the meaning of the following quote I read in regard to this strategy:

"In a pre-easing environment, seeking carry on the curve expresses the view that too much easing is priced into forward OIS rates relative to what is likely to be realized."

How does too much easing being priced into forward OIS rates have anything to do with the eventual steepness of the spot 5yr/30yr curve (which is what carry depends on)?

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  • $\begingroup$ Too much easing may reflect a lower 3m fwd 5s, therefore a steeper 3m fwd 5s30s. Therefore you'd carry fairly badly, I.e.the 5s30s you'd have to realise would be significantly steeper (the breakeven change larger) $\endgroup$
    – user68819
    Commented Aug 29 at 5:05
  • $\begingroup$ And I think you'd mean the carry of spot 5s30s, not the carry of the 3m fwd. $\endgroup$
    – user68819
    Commented Aug 29 at 5:08
  • $\begingroup$ @user68819 so overly-aggressive easing expectations would hurt the carry profile of a steepener, but improve the carry profile of a flattener? $\endgroup$
    – Charles
    Commented Aug 30 at 2:36
  • $\begingroup$ Yes. Imo, you also need to factor in roll down. $\endgroup$
    – user68819
    Commented Aug 30 at 6:03

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