Hedge funds and other institutional investors are continuing to back one of Europe’s most widely held fixed income trades despite repeated setbacks caused by geopolitical tensions and shifting interest rate expectations, according to a report by Bloomberg.
The popular strategy, known as the 10s30s steepener, is based on the expectation that the spread between 10-year and 30-year euro interest rate swaps will widen as longer-dated yields rise faster than intermediate maturities. Although the trade has suffered bouts of volatility this year, market participants remain committed to the position, citing supportive structural and macroeconomic factors.
The strategy was dealt a significant blow following US military action against Iran earlier this year, which reignited inflation concerns and prompted investors to anticipate tighter monetary policy. Those expectations flattened the yield curve, reversing much of the steepening that had developed through 2025.
The trade recovered during a period of relative calm in May and June, but renewed military strikes in July and a rebound in oil prices above $100 a barrel once again weighed on long-end steepening.
According to Julian Baker, co-head of EMEA linear rates trading at JPMorgan, the unwinding of steepener positions earlier this year proved painful for many investors. Nevertheless, he said the strategy continues to rank among the bank’s most popular trades with clients.
The appeal extends well beyond Europe, with hedge funds and asset managers globally positioning for steeper yield curves as governments issue increasing volumes of debt and investors anticipate higher long-term borrowing costs.
In Europe, enthusiasm for the trade has also been driven by structural changes to the Dutch pension system. Reforms shifting the country’s €1.6tn pension market from defined-benefit to defined-contribution schemes are expected to reduce demand for long-dated government bonds and interest-rate swaps over time, providing support for steeper yield curves.
The 10s30s spread widened by more than 50 basis points during 2025, one of the strongest annual moves on record. However, much of that advance was erased after the outbreak of conflict in the Middle East triggered expectations of further monetary tightening to contain inflation.
Although the curve has recently begun to steepen again, the spread remains close to 10 basis points, well below last year’s highs.
Positioning data tracked by Barclays suggests investors have trimmed exposure rather than abandoning the trade altogether, indicating that many still expect shorter-dated bonds to outperform longer maturities if geopolitical tensions ease.
The European Central Bank left interest rates unchanged at its latest meeting but has signalled that further tightening remains possible. Financial markets are currently pricing in around 42 basis points of additional rate increases before the end of the year, leaving investors cautious about adding significant duration risk.
Despite the uncertainty, positive carry and the prospect of structural changes to European fixed income markets continue to make the strategy attractive for hedge funds seeking medium-term opportunities in rates markets.
