Halister News

(Bloomberg) -- GBP rates volatility may extend decline toward EUR equivalents after the BOE signaled a floor for the Bank Rate, causing the distribution of market rates to concentrate into a smaller range, Bloomberg strategist Tanvir Sandhu writes.

• The central bank said Thursday that should data come in as expected, a majority of policy makers expect “a further cut in bank rate to its effective lower bound”; it added that the lower bound is “close to, but a little above, zero”
• GBP short-tail swaption gamma underperformed beyond typical event-risk unwind following these signals from the bank, and still has room to compress toward EUR counterparts; see chart here of spread between GBP and EUR 3m2y normal vols
• However, greater compression may be seen further out the vol grid in long-tail gamma and medium-term vega, with low delivered vols weighing on long positions
• GBP vs EUR 5y5y normal vol spread is 12bp/annual and has been fading from post-Brexit high of 21bp/annual; see chart here
• See chart here on GBP vs EUR 3m10y normal vol spread, now at 12bp/annual
• OIS forwards currently pricing 91% 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 as seen in Japan prior to introduction of negative rates policy in Jan.; see more here

• 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.