Halister News

(Bloomberg) -- The move higher in EUR rates implied volatility driven by four-sigma move in bunds has been less pronounced than during previous large selloffs (2015 bund VaR shock, 2013 Fed Taper Tantrum), and has kept iTraxx Main spreads subdued, Bloomberg strategist Tanvir Sandhu writes.

• It would require a further spike in implied volatilities to impact long-term investors’ flow dynamics and potentially pressure credit spreads to widen moderately; see chart here of EUR 3m10y implied vs iTraxx Main
  • Still, prudence is required given ECB policy risks; a paradox looks set to emerge on potential paring back of accommodative monetary policy in the face of unconvincing core-inflation normalization
• EUR rates volatility remains relatively contained and below the highs seen before French election; factors that fueled the volatility spike during the 2015 bund VaR shock -- extreme bund valuations and low market liquidity -- are not currently supportive; see more here
• While peripheral rates remain exposed to ECB tapering, posing risks to credit, and Italian bonds are at risk of trading more like credit instruments vs duration assets, ECB has flexibility within QE and is currently overweighting BTPs
  • See analysis here from January 10 highlighting the behavior of credit vs peripheral spreads before ECB started QE, when BTP- bund spread vs iTraxx Main had a R^2 of 0.955
• 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 Anil Varma