With the European Central Bank firmly on hold, a low-volatility regime is expected to persist. However, the options market is not fully pricing in the potential for directional curve movements, such as steepening or flattening. This creates opportunities to express curve views through options where the risk is undervalued.

While the Swedish market prices in an extended "on hold" policy from the Riksbank, a downside risk premium could build in the curve. This creates an asymmetric opportunity in long duration positions targeting mid-2026, where the possibility of hikes is negligible but the potential for lower yields offers attractive upside.

Sweden's 2026 budget introduced unfunded reforms worth 1.2% of GDP, far exceeding expectations. This large fiscal injection surprised markets, pushed interest rates higher, and shows how expansionary government spending can counteract a central bank's monetary policy signals.

Contrary to Norway, Sweden faces significant downside inflation risks. A forthcoming VAT cut in April, combined with large basket effects between March and May, is expected to push core inflation towards 0.5%. This will significantly undershoot the Riksbank's forecast and intensify pressure to ease monetary policy.

In the early stages of a Fed easing cycle, short-term rates fall while long-term rates remain sticky, causing the yield curve to steepen. The rally in long-dated bonds only occurs much later, after investors get comfortable with low rates and begin chasing carry trades.

The Riksbank cut rates, but its forward guidance and a dissenter's vote signal a very high bar for future easing. The move, based on forward-looking inflation expectations rather than current data, effectively marks the end of the easing cycle and creates opportunities for carry trades.

Fed rate cuts primarily lower short-term yields. If long-term yields remain high or rise, this steepens the curve. Because mortgage rates track these longer yields, they can actually increase, creating a headwind for housing affordability despite an easing monetary policy.

A high-conviction view for 2026 is a material steepening of the U.S. Treasury yield curve. This shift will not be driven by long-term rates, but by the two-year yield falling as markets more accurately price in future Federal Reserve rate cuts.

The investment case for a stronger Swedish Krona (SEK) is not based on the Riksbank raising interest rates. Instead, the currency's strength is expected to come from positive domestic growth, fiscal policy, and regional economic spillovers, making rate differentials a secondary driver.