HALISTER1: EUR 6m10y Cheap vs Implied Volatility on Short Tails: Barclays

EUR 6m10y Cheap vs Implied Volatility on Short Tails: Barclays

(Bloomberg) -- EUR 6m10y vols are now looking cheap compared with vols on shorter tails, which have not declined despite the ECB’s reluctance to cut rates aggressively, Barclays strategists including Amrut Nashikkar write in a client note.
  • Recommend buying 6m10y receiver spread and selling 6m2y1y low strike receiver to benefit from a potential bull- flattening of the curve
    • Buy EUR100m 6m10y receiver spread struck ATM vs ATM-20bp
    • Sell EUR1b 6m2y1y receiver struck ATM-5bp
  • At initiation, trade is net short duration of ~EU2k/bp and short vol ~EU3k/abpv exposure
  • Earns ~70c (or 7bp of 10y DV01) in carry if the rates curve remains unchanged over the next six months
  • Sharp rally in front-end rates would be required for the trade to begin losing on expiry
  • Since 6m10y vols are richer from an absolute level perspective, conventional bull-flatteners using ATM receivers would require an upfront premium so therefore recommend initiating this alternative structure
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Amrut Nashikkar (Barclays PLC)

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