Sell-off fails to ignite implieds
Euro fixed income took a hit during the afternoon session after Canada hiked rates, causing global bond markets to sell-off. The 10y Bund future was last trading -80 ticks lower while the 10y Bund yield was up +8.5bps at 2.455%.
The jump in realised and directional movement lent support to the upper left corner as red Euribors declined up to -12bps. For instance, 3m2y was last +0.6nvol at 110.0 normals.
However, the rest of the grid shrugged off the sell-off with top right gamma marked up to -1.5nvol lower while vega was unchanged or a touch lower.
“In the bigger picture, I don’t think what Canada does on rates is going to change the ECB’s policy path. Yesterday’s inflation report suggested a slowdown and that is a bigger factor for Europe,” reckoned one trader.
As such, pieces such as 1y10y are finishing the session -0.5nvol lower at 99.6normals while 1y10y is down by -0.7nvol at 89.8normals.
Bearish gamma bias - JP Morgan
Strategists at JP Morgan have a bearish bias in gamma, especially at the front-end of the curve. The banks writes:
- “Front-end implieds are now exhibiting a strong negative relationship to the peak policy rate priced in the €STR curve. This is intuitive in the late phase of the central bank hiking cycle; as we approach the end of the hiking cycle, the uncertainty around the peak terminal rate should diminish and the peak terminal rate priced should converge to this.
- “An increase in the peak should be associated with trimming of the higher tail of the distribution around the peak and thus lead to lower volatility. The ECB I also communicating their intention to bring the the hiking cycle to an end soon… In our view this gives a bias to the peak policy rate in the cycle to be below (or equal to) 4% as opposed to above 4%. A trimming of the higher tail warrants lower volatility.
- ”To be sure, our bearish gamma bias is not based on an exception of further increase in peak pricing of policy rates but rather of an expectation that this will remain in a tight range, which would likely keep front-end yields in a range over the near term and therefore warrant lower implied and delivered volatility…”
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