Halister News

(Bloomberg) -- Payer skews in U.S. rates continue to remain flat and don’t reflect any risk of a positive shift in the mood of Fed and ECB policy in the second half of the year, Bloomberg strategist Tanvir Sandhu writes.

• See chart here of spread between USD 3m10y 25bp OTM payer vol and 25bp OTM receiver vol
• Short-dated skews tend to predict subsequent changes in underlying rates, with flatter skews since December indicating risks to duration shorts
• There has been limited appetite for payer skews despite significantly cheapening as Trump reflation trades extend unwind amid latest U.S. political crisis around possibility that the president may have obstructed justice, an impeachable offense
• There is an active debate around a potential change in risk language at the ECB meeting on June 8, before the FOMC on June 14. ECB is expected to gradually reduce its net purchases of government bonds to zero over the course of 2018
• FOMC speakers continue to discuss scenarios for balance-sheet normalization and seem inclined to start a path of gradual reduction from 2018 while U.S. Treasury issuance may increase via delivery of powerful fiscal expansion policy
• A normalization in accommodative policy will see the private sector needing a greater discount on bonds as they may increasingly underwrite a bigger amount of duration risk. This would see the term premium finally begin to normalize
• 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

To contact the reporter on this story: Tanvir Sandhu in London at tsandhu17@bloomberg.net To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net Anil Varma