Central Bank Policy Path Snuffs Out Rates Volatility: Analysis
(Bloomberg) -- G-4 long-rates volatility may continue descent next month given limited macro risks after BOJ/Fed meetings trigger reflattening of global bond curves and encourage carry trades, Bloomberg strategist Tanvir Sandhu writes.
- With more than a month to go for U.S. presidential election, USD long-tail gamma vols may continue to drift lower as Fed flattens the trajectory of expected rate increases, keeping long-end rates contained
- USD vol curve flattening may continue with short-tail gamma subject to uncertainty over Fed policy while Fed flattening may continue to suppress long-tail gamma
- EUR long-end rates face net negative EGB supply in October, which will keep yields pressured to the downside with receiver interest showing signs of emerging
- JPY long-tail vols have collapsed after the BOJ narrowed the distribution of long-end rates via guiding the market toward the fair curve by conducting fixed-rate purchase operations and targeting 10-year JGB yield at near zero
- JPY long-tail receiver skew may have room to move higher vs payers with BOJ yield curve control reaction function to likely to be more aggressive on higher yields
- BOE has been signaling a floor for the Bank Rate where policy makers expect “a further cut in bank rate to its effective lower bound”, also causing the distribution of market rates to concentrate into a smaller range
- GBP rates vols have extended decline toward EUR equivalents with greater compression seen further out the vol grid
- NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
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