Halister News

(Bloomberg) -- Bund yields may not be able to crack the bottom end of the recent range this time around, which may see the June put skew richen, Bloomberg strategist Tanvir Sandhu writes.

• See chart here highlighting the richness in the bund call skew and chart here for widening of spread between ATM implied vols on June (May 26 expiry, after French election) and May (April 21 expiry) vs OAT/bund spread
• Duration of Bundesbank’s PSPP purchases over March was 4.72 years, remaining near the lows while PMIs remain solid and Le Pen tail risk unwind after election may see bund downside perform as yields revisit the upper end of the recent range around 45bp; however, falling inflation expectations are supporting long-end valuations, which should keep yields contained
• Bund yields have been dragged lower by the push-back in ECB rate-hike expectations and peak inflation (see more here) with Eonia 12x24 back to pre-March ECB levels at -0.27% vs recent peak of -0.15%
• Interest in paying the back-end of 2018 now offers better risk-reward as the battle between hawks and doves in the central bank on policy normalization could intensify in the second half of this year and the recent unwind may be seen as a bull trap; see more here
• NOTE: U.S. rates options underpricing potential moves; see analysis here highlighting low-carry directional ideas on potential changes to U.S. tax code vs Fed terminal rate lacking escape velocity

• 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