EUR Rates Volatility Stays Relaxed Into ECB With Path Laid Out
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
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2539Z GR (European Central Bank)
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UUID: 7947283
(Bloomberg) -- EUR rates volatility remains relaxed into ECB meeting with risks of a large dovish surprise or significant divergence from July meeting limited, and with the September/October meeting likely reserved to outline further details on QE.
- EUR 3m10y trades at 169bps (1m10y at 91.5bps, 2m10y at 141bps) near record-low levels
- August 2017 bund straddle, which expires tomorrow, has breakeven of 5bps (equivalent to strike levels at about 161 and 162.50, spot ref. 161.75)
- While the net takeaway from the meeting may be bearish for rates as ECB’s concessions on wording evolves given the 33% issue limit, with consensus seeing echo of Draghi’s Sintra comments that saw a four-sigma move in bunds, it means they have to end QE earlier than inflation dynamics warrant
- EUR TWI has already hit pre-QE levels, which may lead to some soothing words at the press conference but ECB can take comfort from the fact that peripheral spreads have stayed contained since Sintra
- While the fair value for bunds was only modestly rich prior to Sintra (vs extreme valuations prior to 2015 bund VaR shock), a further selloff toward 70bps area may see bunds cheapness stretched given diminishing inflation risk
- ECB-dated Eonia prices 16bps depo-rate increase by December 2018 and bund ASW at 40bp looks set for further structural compression as purchases wind down while focus remains on the short-end of the curve
- 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
Alert: HALISTER1
Source: BFW (Bloomberg First Word)
Tickers
2539Z GR (European Central Bank)
To de-activate this alert, click here
To modify this alert, click here
UUID: 7947283