Decline across the grid
Euro implieds are lower across the board amid a session of low day-on-day realised volatility with the 10y Bund future finishing near unchanged.
The upper left corner also saw a decline despite near-term event risk from Thursday’s ECB meeting. For instance, 1m2y is marked down by 0.8 at 87.3nvol although it remains above the intra-day lows of 84nvol hit a couple of sessions ago.
Further out, 3m expiries are being marked down by anywhere from 0.8 to 1.6nvol. For example, 3m10y is down by 1.6 at 93.9nvol and testing lows form the past month or so.
Further out, vega also ticked lower and continues to retreat from the late August highs, such as 10y10y down 0.2 at 74.6nvol.
Stay short front-end gamma - JP Morgan
In its latest rates weekly JP Morgan recommends staying short front-end gamma. The bank writes:
- "Front-end implieds have declined over the summer weeks and are now at YTD lows and close to levels seen just before the market started to price aggressive ECB rate hikes in 1Q22. We believe that implieds have further room to decline over the medium-term. This primarily reflects our view that the ECB is close to the end of its hiking cycle. This broadly removes risk of large upside moves for the peak terminal rate and thus warrants lower volatility.
- "We also believe that risk for large decline in peak terminal rates is also low given that current macro and inflation backdrop support the ECB to stay on hold for the next several months. This supports further reduction in risk premium and thus lower volatility...
- "Short-term factors also support front-end short gamma positions. First, front-end implieds are exhibiting a decent correlation versus yields and our bullish duration bias supports lower implieds... Second, delivered volatility at the front-end is well below implieds and thus offers good cushion against jump risk... jump risk has subsided significantly; 2Y yields have jumped 10bp or more only once over the last month (10.5bp)."