HALISTER1: Sell EUR Rates Vega to Enchance Income Return: Commerzbank

Sell EUR Rates Vega to Enchance Income Return: Commerzbank

(Bloomberg) -- Selling EUR rates vega optionality favorable for investors seeking to stabilize long-term portfolio returns (e.g. via zeros) and/or cash flows to better match minimum income requirements (e.g. legacy defined benefit schemes), Commerzbank strategist Markus Koch writes in client note.
  • Buy 2.25% single callable with 30y term with a 10y lockout
    • Appears beneficial both as regards the coupon of 2.25% per annum, and given long-term investors’ need for duration under ALM
  • Callables with even shorter lockout periods feature a considerably shorter (option-adjusted) duration and a higher negative convexity than longer lockouts
  • Assuming bullish rates trends were to resume, long term, they would underperform vs non-callable bullet notes, all else being equal
  • Conversely, convexity risks in 10y lockouts are substantially lower, allowing investors to capitalise on a given coupon cash flow for longer
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

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Markus Koch (Commerzbank AG)

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