Halister News

(Bloomberg) -- Treasury futures skews have been fading the Korea-risk premium but low-delta calls still remain over puts. Beyond geopolitical risks, payer skews have also cheapened as the Fed’s reaction function evolves from rate hikes to reliance on balance-sheet reduction for policy normalization.

• TY Sept. futures call skews has faded this week with downside partially re-building; see chart here
• In the OTC space, payer skews continue to trade cheap across the grid, while receiver skews have been well bid last week
• With inflation continuing to disappoint, FOMC minutes highlighted incremental skepticism creeping in that inflation would stabilize around the target over the medium term
• Selective hedges make sense, given that vols remain near cycle lows with U.S. and South Korean military exercises from Aug. 21 posing headline risks, while thin summer markets may exacerbate moves
• Game theory suggests that the probability of a conflict is low, given positive diplomatic outcome is best for both sides; however, the risk of North Korea becoming able to launch a nuclear intercontinental ballistic missile is making the matter increasingly more urgent for the U.S.
• KOSPI2 3-month ATM implied volatility has fully unwound the conflict risk premium, closing at 11.8%, fading from high of 16% last week
• The South Korean market response has been modest, with domestic implied volatility only reaching below/near long-term averages, highlighting that the pricing of an all-out conflict in the peninsula remains remote; see more here
• 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

To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Keith Jenkins

(Bloomberg) -- Recommend selling German 5y at -26bps as the expected summer rally is losing steam and the prospect of ECB policy adjustments should see a gradual rise in core yields, BNP Paribas strategists including Eric Oynoyan write in a note.

• Two major shocks will affect the belly of the curve:
  • Repricing of the forward Eonia curve, as BNP expects a full normalization to 0% in 2H 2018 
    • ECB-dated OIS rates currently price for just ~9bps of rate rises by end of 2018
  • Change in net supply from -EU269b after PSPP in 2017 to slightly positive in 2018, assuming QE buying ends by summer 2018; this dislocation in supply and demand warrants higher core yields
• Sell German 5y 10/2022 at -26bps, target -10bps, stop -36bps, carry and roll -2.1bps/month

To contact the reporter on this story: Conor Molumby in London at cmolumby@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma

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(Bloomberg) -- Bund futures (RX1) technical levels in focus.

• Daily Trend Bias: Bullish
• Comment: Wednesday’s bullish reversal day (‘hammer’ candle) against 100-DMA support at 163.39 reasserts topside risks; 164.64 level back on the map
  • Resistance: 164.08; 164.15-21 (strong); 164.34; 164.40-45; 164.64
  • Support: 163.79 (pivot); 163.55; 163.36; 163.25
• NOTE: Roll-adjusted by difference in GFUT
• NOTE: Sejul Gokal is a FICC technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Sejul Gokal in London at sgokal1@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma

--CHRISTIAN WIENBERG