Overview
Bank of America released a research note stating that euro‑area interest‑rate expectations and inflation expectations have diverged, creating what it views as a trading opportunity because markets are pricing in almost four full European Central Bank (ECB) rate hikes for the current cycle.
Market Pricing and Energy Context
The note highlights that natural‑gas prices have surged to new highs since the onset of the war in Iran, a factor that has forced markets to embed the additional hikes. However, strategist Ralf Preusser argues that this pricing is excessive; he points out that futures markets still price a scenario fully consistent with the ECB’s June base case and remain well below the bank’s adverse scenarios. The weighted average of gas and oil implied by futures is therefore in line with the ECB’s June projections.
BofA Outlook and Trade Recommendations
BofA projects that the ECB will deliver roughly 60 basis points of cumulative rate hikes this year, after which it expects the central bank to cut rates in the following year. The bank notes that neither the real‑yield curve nor the nominal curve currently reflects this anticipated path. It recommends several relative‑value strategies: receiver calendar spreads, BTPei barbells weighted as forward flatteners, and “gamma‑breakeven” trades that pair inflation‑linked longs with payer shorts.
Implications
The mismatch between rate and inflation expectations, combined with elevated energy prices, suggests to BofA that real rates appear cheap relative to nominal rates, presenting the outlined trading setups as potentially profitable.