EUR Vol: Implieds stall amid rate rally
Implieds stall amid rate rally
Bunds have rallied higher following weaker than consensus German IFO at the start of the session and having shrugged off a sharp drop in gilts amid higher than expected UK CPI data. The 10y Bund future was last up 10 ticks while the gilt was trading around 40 ticks lower as the sterling curve sharply bear-flattened.
Meanwhile, euro implieds have been mixed with one dealer struggling to identify an overarching theme from today’s session.
“Directionally, the rate rally has helped to keep a lid on vols,” a dealer said. For instance, 1m expiries have lost up to 4.5 normals with 1m5y last down by -4.5 at 99.7nvol and marking a new 2023 low.
Across the grid, one trader observed that, “The left-hand side is continuing to underperform a little bit as we’ve seen some covering on the right-hand side. But that short covering seems to have paused for now,” he noted.
Elsewhere, longer-dated vega pieces were “mixed” and “little changed” with 10y10y last -0.2 at 75.3 and roughly in the middle of the range from the past month or so.
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Bear flattener via payers - JP Morgan
In its latest rates research JP Morgan continues to favour holding a conditional 1s/5s bear flattener via 1m payers. The bank writes:
- “On the swap curve, we recommend 1s/5s conditional bear-flattener as a hedge to our bullish duration view. The 1s/5s swap curve has exhibited a strong negative directionality to yields and we expect this dynamic to continue over the near-term.
- “The repricing lower of the volatility surface, along with a steepening of the vol curve across tails (1y implied is below 5y implieds), allows us to enter conditional bear flatteners at level that is around 4bp better than forwards; the volatility difference more than offsets the negative rate curve carry of flatteners. Overall, we recommend 1s/5s conditional bear flatteners implemented via 1m payers.”
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