HALISTER1: EUR Swaption Fat Tails Signal Higher Rates Unlikely: Commerzbank

EUR Swaption Fat Tails Signal Higher Rates Unlikely: Commerzbank

(Bloomberg) -- Shrinking fat tails in EUR payers vs receivers indicate that materially higher IRS 10y and/or 30y become less likely, Commerzbank strategist Markus Koch writes in client note.
  • OTM receiver and payer vols and especially the change thereof give a better handle on the probabilities for a specific rate scenario currently priced into gamma and even vega expiries
  • For instance, if a risk reversal is printing negative readings, implicit probabilities for (exceptionally) large upward moves in underlying IRS (payers) are perceived as larger than with receivers
  • OTM volatility is thus skewed in favor of payers (fatter tails) which are more bid relative to receivers
  • Comparing recent 30y IRS trends with the same period in 2015 reveals a strikingly similar pattern while vol skew patterns look less straight forward
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Markus Koch (Commerzbank AG)

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