Halister News

(Bloomberg) -- A more explicitly defined forward guidance by the ECB this week would damp both realized and implied vols of Schatz in the near term, while longer QE tapering should keep vols contained over the medium term.

• Realized Schatz volatility is likely to remain low with Eonia curve currently pricing around 10bp of ECB rate hike by March 2019 and the central bank likely to retain/enhance forward guidance. Given that, any flare-ups in implied vols are likely to be faded by systematic short-gamma strategies
• Risk of change in low realized-vol regime at the front-end will come from repricing of ECB rate path or Schatz swap spreads vol
• Investors have attached an independent return stream to volatility such that a spike in volatility simply becomes a selling parameter
• Bund implied vols will be lifted in the scenario of a hawkish ECB given positive convexity in a selloff and asymmetry with lower QE purchases for longer market consensus
• NOTE: Bund skew is tilted toward higher rates that may richen into the ECB meeting, see more here from October 18 where downside skew has since richened with bunds selling-off
• NOTE: ECB’s efforts to keep EUR rates volatility contained has worked so far with no taper tantrum in sight for now, leaving forward vols with greater potential for gains than spot in the near term; exposure via calendar spreads using mid-curve options may appeal, 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 Anil Varma