Halister News

(Bloomberg) -- EUR 2s10s swaption implied volatility curve may steepen from near the lower end of a multi-year range should ECB refrain from acting on bund scarcity this week, Bloomberg strategist Tanvir Sandhu writes; see chart here.

• EUR 2s10s now at 28bp/annual vs 5-year average of 30bp
• Over the last week, belly gamma implieds have outperformed with 1m5y +0.20bp/day at 2.32bp/day (see swaption spreadsheet here)
• Economists predict ECB won’t ease policy further at Thursday’s meeting; the central bank may hint at steps it could take in September and possibly even tweak QE to address bund scarcity; see ECB PREVIEW here
• However, vol curve could flatten if ECB acts to address bund scarcity
  • Any removal of depo floor should increase vol at the front end, pushing the vol curve flatter
  • Eonia currently pricing 97% odds of a 10bps ECB deposit rate cut in Jan. assuming 7bps Eonia-depo rate corridor
  • German 2Y yields trading 21bp below the depo rate reflect increasing expectations of ECB making adjustments to QE parameters to tackle increasing scarcity of bunds: see more here

• NOTE: Tanvir Sandhu is an interest-rate and derivatives strategist who writes for First Word. The observations he makes are his own and are not intended as investment advice.