HALISTER1: GBP Rate Vols Compression vs EUR Greater Further Out the Grid

GBP Rate Vols Compression vs EUR Greater Further Out the Grid

(Bloomberg) -- GBP rates volatility extends decline toward EUR equivalents with greater compression seen further out the vol grid in long-tail gamma and medium-term vega, Bloomberg strategist Tanvir Sandhu writes.
  • GBP vs EUR 5y5y normal vol spread is 7bp/annual and has been fading from post-Brexit high of 21bp/annual; see chart here
    • Compressing after BOE signaled a floor for the Bank Rate, causing the distribution of market rates to concentrate into a smaller range, see more here from Aug. 7
  • See chart here on GBP vs EUR 3m2y normal vol spread which remains stable post BOE, now at 7.5bp/annual
  • OIS forwards currently pricing 68% probability of a 15bp BOE rate cut to 0.10% by Dec.
  • GBP ATM vols may decline as rates move closer to zero due to the asymmetrical distribution ahead and lower delivered vols; see more here from Aug. 2
  • 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.
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