I'm looking to position around the April and June ECB OIS meeting dates. Let's assume the market is pricing in a rate cut in April and then a hold in June.
Would it make more sense to take a payer position (e.g., pay fixed in the Apr/Jun spread)? Alternatively, would a steepener be the better structure? How should I expect the Apr/Jun spread to move in response to this expected ECB policy path?
You can trade digital put on the rate cut size in April meeting. This can be strcutured as option on the spread between two 1D ESTER forward rates. Generally speaking, to express view on central bank decisions, one can trade options on overnight rate.
Naturally, the way you would trade the outlined meeting spread depends on what your view is. For the sake of answering your question, let’s assume that the April ECB meeting has a full 25bps priced whilst the June ECB meeting has 0bps priced. If your view is that the ECB will cut in both April and June, then you could trade this by flattening Apr/Jun (i.e. pay Apr, rec Jun). In this scenario, you would make ~25bps (simplistically ignoring the effects of compounding & daily fluctuations in ESTR).
In terms of the mechanics of the product, it is worth noting that overnight indexed swaps linked to meeting dates are forward starting. In EUR, the effective date of the swap occurs T+4 after the meeting date, and the maturity is T+4 after the next meeting date (note that this is a bit of an anomaly compared to most other G10 currencies - T+1 or T+2 is more common). It is also worth noting that at the time of writing, o/n ESTR has a negative basis to the ECB’s DFR, so an ECB OIS is not perfectly linked to the underlying policy rate.
