The rates escape

A sudden inversion of the euro interest rate curve in June caught dealers and investors by surprise, causing losses for those that had put on curve steepener trades. Dealers rushed to hedge their short gamma positions, forcing the curve to invert further - and pushing losses into the billions. Why weren't dealers prepared? Peter Madigan reports


When European Central Bank (ECB) president Jean-Claude Trichet remarked on June 5 that the bank had "not excluded that we could decide to move our rates a small amount in our next meeting" in response to rising inflation, he could scarcely have imagined the dramatic impact this seemingly innocuous comment would have on the interest rate derivatives market.

Over the next three trading days, spreads on euro constant maturity swap (CMS) pairs underwent a dramatic inversion unprecedented in the

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