A “toxic combination” of factors has conspired to create “stifling” trading conditions in rates, where efforts to construct alternatives to the current status quo are frustrated by one or more obstacles.

That’s according to Deutsche Bank’s Aleksandar Kocic who, in a new note, described a strange, onerous reality defined by thin flows and the disappearance of relative value.

Kocic walked through two examples to illustrate a broader point about counterintuitive payoff profiles which ultimately suggest trading has become futile. The first example involved selling a 1Y1Y straddle. If there’s no repricing over the life of the trade, profits are maximized. In theory. As things stand currently, though, the position has negative P&L if the curve remains unchanged, which Kocic noted “goes totally against the grain of logic of a short convexity position.”

In the second example, he illustrated a similarly futile attempt to position for steepeners in an RV context. “Based on simple macro reasoning and in tune with our (and consensus) rate forecast, one expects 150-200bp of curve steepening over the next 12 month horizon [but] the spread between spot 2s10s and its 1Y forward is about 90bp — forwards eat up a large fraction (about 50%) of the possible upside!” he exclaimed, before driving the point home by way of a specific implementation. I’ll skip to the punchline from Kocic: “The trade loses money even if nothing happens… an antithesis of a short convexity position.”

He likened the situation for anyone trying to put on simple steepeners to paying a high premium for high-deductible insurance. It’s “doubly unattractive” and it’s also counterintuitive.

Kocic cited macro uncertainty and policy ambiguity which, when considered with elevated vol and inverted curves, have “create[d] paralysis and inhibit[ed] RV, which indirectly erodes liquidity.” “Things are offered either at very unattractive entry levels or have unfriendly carry and risk profile (sometimes all three at the same time),” he went on, summarizing how the market has effectively cut off alternatives that don’t conform to the bear flattener.

Resistance to that status quo is discouraged by the shape of the term structure and vol surface. So, if you’re going to fight it, you need to be sure. As Kocic put it, your conviction “should overpower other considerations.”

The problem: Nobody is sure about much of anything these days. Kocic summed it up. “Given the distribution of risks and singularity of the current configuration defined by the macro/policy mix, conviction has been one of the most precious commodities,” he said.

These days of ours are strange indeed.