Marketing Communication
Group Economics
Euro Rates Weekly
Macro & Financial Markets Research Kim Liu +31 20 343 4669 kim.liu@nl.abnamro.com
Assume brace position!
DISCLAIMER: This report has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead. This report is marketing communication and not investment research and is intended for professional and eligible clients only.
19 June 2015
Short maturing bonds exhibit much lower volatility than during the crisis years Intraday yield volatility of 2y bonds is significantly lower than 10 and 30y bonds Volatility of 10y peripheral bonds has decreased significantly compared to crisis-levels However, 30y bonds of virtually all eurozone countries still exhibit crisis-level volatility Accommodative monetary policy has dampened volatility of short term bonds As the ECB will remain in easing mode, we think that short bonds will continue to provide the best protection in volatile markets
And the supply monitor: Belgium, Holland and Italy will enter the primary market. Gross supply is expected to be light. How to position in times of high volatility?
2y Bund volatility is lower than in the crisis years
Last week, we argued that current volatility in 10y Bunds
In bps
compares to the same levels as we have seen in the eurozone debt crisis and Lehman fallout (see here for the full publication). With a Grexit looming and with QE having
40 30
distorted the market significantly, we expect a prolonged period of heightened volatility. In this weekly we go one step further and asses which areas on the curve offer low volatility
20 10
and therefore give protection in times of stress. To assess these relations, we turn to the same method we adopted in our latest note and focus on intraday volatility.
0 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
2y DBR daily yield volatility
Lower volatility exhibited in short maturing bonds The graphs below show the intraday yield volatility of 2, 10 and
Source: Bloomberg
30 year Bunds. The graphs show that volatility in 2y maturing bonds is currently much lower than during the crisis years.
10y Bund volatility is comparable to crisis levels
Whereas during the crisis years, intraday volatility peaked
In bps
above 30bps, the current intraday volatility in 2y bonds is
40
actually limited to low single digit levels. Conversely, volatility exhibited in 10 and 30y maturing German bonds is still comparable to market conditions at the height of
30 20
the eurozone debt crisis years and Lehman collapse. This confirms our belief that the current level of volatility in longer maturing German bonds is consistent with highly stressed periods.
10 0 Jan-07
Jan-09
Jan-11
Jan-13
10y DBR daily yield volatility Source: Bloomberg
Insights.abnamro.nl/en
Bloomberg: ABNM
Jan-15
2
Euro Rates Weekly - Assume brace position! - 19 June 2015
Also 30y Bunds exhibit crisis-level volatility
30y BTP still exhibit crisis levels volatility
In bps
In bps
50
40
40
30
30 20
20 10
10 0 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
0 Jan-07
30y DBR daily yield volatility
Jan-09
Jan-11
Jan-13
Jan-15
30y BTP intraday volatility
Source: Bloomberg
Source: Bloomberg
Volatility in 30y area is still very high for most countries
Dovish monetary policy has dampened volatility in 2y
In our latest weekly, we observed that volatility of 10y non-core
bonds
bonds has decreased significantly, compared to levels seen
Short-term rates are generally less volatile than longer rates,
during the crisis years. As a result, the difference between
as the former are more influenced by the monetary policy
volatility of 10y peripheral bonds and 10y core bonds has
stance of the central bank while the latter are more dependent
declined. However, volatility has not decreased at the same
on supply and demand forces. Since monetary policy by the
pace for non-core countries across the maturity spectrum.
ECB has been very accommodative in recent years, we
Below we show 2 graphs, the first displays intraday volatility of
believe that this has dampened volatility of short term rates.
10y BTPs, while the second one for 30y BTPs.
Indeed, the ECB has lowered its main benchmark rate to historically low levels. Furthermore, excess liquidity in the euro
The graphs show that while volatility in 10y has decreased
system is still abundantly available, which also puts downward
significantly, volatility in 30y BTPs is still elevated. Also other
pressure on short term rates and dampens volatility. Also,
non-core countries exhibit crisis like volatility in the long part of
rules embedded in the ECB’s QE programme are actually
the curve. This means that volatility of virtually all 30y maturing
suppressing volatility of short term bonds. By deciding to
eurozone bonds is in line with crisis levels. Another interesting
purchase bonds up to the ECB deposit facility of -20bps, the
feature is that the volatility peak (in absolute levels) of 10y
ECB has effectively anchored short term rates around this
BTPs is much higher than the peak in 30y BTPs. The same
level.
observation is seen in bonds issued by other eurozone countries, except for Germany and the Netherlands.
Low volatility in 2y bonds is likely to remain We believe that there will be no change in the accommodative
Volatility in 10y BTP has decreased significantly
stance of the ECB in the near future. This means that volatility
In bps
of short term rates is likely to remain subdued, despite the level of turmoil in the markets. Even the pricing in of an QExit
80
will keep investors less exposed to an increase in yield volatility of short maturing bonds. Indeed, we expect that when
60
an QExit will be priced in, yields will tend to normalize. However, short rates will still be anchored to the conventional
40
ECB benchmark rates. Also it is unlikely that excess liquidity will decrease in the short term. This means that if investors
20
want to position themselves for high volatility, short bonds 0 Jan-07
have offered and are likely to continue to offer the best Jan-09
Jan-11
Jan-13
10y BTP intraday volatility Source: Bloomberg
Jan-15
protection.
3
Euro Rates Weekly - Assume brace position! - 19 June 2015
Supply monitor Gross supply will be light next week. Belgium and the Netherlands have announced to auction up to EUR 4.3bn, while also the Italian Treasury will auction an undisclosed amount later in the week. No coupon or redemptions are scheduled to be repaid. Next week, 3 eurozone countries will enter the primary market. On Monday, the Belgian treasury will auction 3 lines, the OLO September 2020, June 2025 and June 2045. The BDA has set the target at EUR 2 – 2.8bn. On Tuesday, the DSTA will reopen its 30y benchmark. The DSL January 2047 will be reopened for EUR 1 – 1.5bn. We will release a preview on Monday. On Thursday, the Italian Treasury will hold an auction, no details are disclosed.
Key events Day
Date
Time
Country
Key Economic Indicators and Events
Monday Monday
6/22/2015 6/22/2015
16:00:00 19:00:00
US EC
Existing home sales - % mom Euro area leaders hold emergency meeting on Greece
Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday Tuesday
6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015 6/23/2015
3:45:00 8:45:00 10:00:00 10:00:00 10:00:00 13:00:00 14:00:00 14:30:00 15:00:00 15:45:00 16:00:00
CN FR EC EC EC TR HU US US US US
PMI manufacturing - index (HSBC) - flash Business confidence manuf. - index PMI services - index Composite PMI output PMI manufacturing - index Repo rate - % Base rate -% New durable goods orders - % mom FHFA house price index - % mom Markit - Flash PMI New homes sold - % mom
Wednesday Wednesday Wednesday Wednesday
6/24/2015 6/24/2015 6/24/2015 6/24/2015
9:30:00 10:00:00 14:30:00 18:00:00
NL DE US FR
Producer confidence manufacturing - index Ifo - business climate - index GDP - % qoq annualised Total jobseekers - thousands
Thursday Thursday Thursday Thursday
6/25/2015 6/25/2015 6/25/2015 6/25/2015
13:00:00 14:30:00 14:30:00 14:30:00
CZ US US US
Repo rate - % Initial jobless claims - thousands PCE deflator core - % mom PCE deflator core - % yoy
Friday Friday Friday Friday
6/26/2015 6/26/2015 6/26/2015 6/26/2015
1:30:00 1:30:00 10:00:00 16:00:00
JP JP EC US
CPI - % yoy Unemployment - % M3 growth - % yoy Univ. of Michigan cons. confidence - index
Period
Latest outcome
Consensus
ABN AMRO
May
-3.0
4.2
4.8
Jun P Jun Jun P Jun P Jun P Jun-23 Jun-23 May Apr Jun P May
49.2 103.0 53.8 53.6 52.2 7.5 1.65 -1.0 0.3 54.0 7.0
49.4 102.0 53.7 53.6 52.2 7.5 1.50 -0.7 0.5 54.2 -0.7
53.9 53.8 52.4 7.5 1.50 -0.3 0.5 54.0 -0.5
Jun Jun 1Q T May
4.0 108.5 -1.0 26.0
108.1 -0.2
Jun-25 Jun-20 May May
0.05 267.0 0.0 1.0
0.05
May May May Jun F
1.0 3.0 5.0 95.0
0.4 3.3 5.4 94.6
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
3.8 108.0
0.05
0.1 1.2
5.5 96.0
4
Euro Rates Weekly - Assume brace position! - 19 June 2015
Summary of Rate Views and Trade Ideas
Total PnL open trades (bps) Total PnL closed positions (bps) Total PnL (bps)
Perform ance is in bps, positive PnL is show n in black
Open trades Type of Trade Rationale Outright We expect 10y bund yields to drop further on the back of scarcity as well as liquidity constraints.
Trade Idea Buy DBR February 2025
ASW
Scarcity as well as more core bonds trading below the floor of -20bps will drive the ECB up the curve. This should spark outperformance of these bonds in ASW terms.
Curve
The ECB will buy up to 30y. Supply imbalances and the search for yield will bias 10s30s in core bond markets to flatten.
Credit
-143 21 -122
Start date 2/4/2015
Entry 37
Now 77
PnL -40
Buy DBR August 2046
2/4/2015
-28
-11
-17
Buy DBR August 2046 vs Sell DBR February 2025
2/4/2015
60
70
-10
Favour credit long due to QE. Outperformance is likely via outright ECB Buy BGB June 2046 vs Sell DBR July 2044 purchases and search for yield (portfolio rebalancing effect). In semi core we prefer Belgium over France. 30y OLO-Bund is more interesting than 10y OLO-Bund.
2/4/2015
44
54
-10
Credit
Same rationale as above. In periphery we prefer Spain over Italy given better Buy SPGB April 2025 vs Sell DBR February 2025 economic fundamentals.
2/4/2015
111
150
-39
ASW
We judge a Grexit will not occur, which would support tightening of EFSF bonds.
Buy EFSF July 2044
2/13/2015
4
19
-15
Credit
We think that L채nder still offer attractive value vs Bunds. We also expect L채nder bonds to be included in the PSPP programme The increase in yields have rendered 2s5s cheap. We also expect NCBs to focus their buying on relatively shorter maturing debt.
Buy NRW October 2025 vs DBR February 2025
4/24/2015
23
32
-9
Buy OBL April 2020 vs Sell June 2017
5/7/2015
29
32
-3
Curve
Closed positions Type of Trade Rationale Credit EIB trades tight vs DSLs but still offers an attractive pick up in the long end.
Trade Idea Long EIB March 2042 vs Sell DSL January 2042
Start date 2/13/2015
Close date 4/1/2015
Entry 28
Close 7
PnL 21
Euro Interest Rate Forecasts *denotes forecasts
Outright Yield Deposit facility Refi Marginal lending Eonia 1m Euribor 3m Euribor 2y Germany 5y Germany 10y Germany 30y Germany 2y IRS 5y IRS 10y IRS 30y IRS Curve Spreads Germany 2s5s Germany 5s10s Germany 10s30s 10y Bond Swap Spread IRS 2s5s IRS 5s10s IRS 10s30s 10y Government Bond Yield Spreads Finland Netherlands Austria Belgium France Ireland Italy Spain Portugal Greece Forecasts: ABN AMRO Group Economics
3m -0.20 0.05 0.30 -0.06 -0.01 0.02 -0.23 -0.10 0.19 0.63 0.09 0.25 0.54 0.89
1m -0.20 0.05 0.30 -0.11 -0.05 -0.01 -0.21 0.06 0.60 1.21 0.11 0.39 0.92 1.33
Now -0.20 0.05 0.30 -0.12 -0.06 -0.01 -0.20 0.12 0.76 1.47 0.15 0.52 1.14 1.60
2015Q4* -0.20 0.05 0.30 -0.08 -0.05 0.00 -0.20 0.00 0.50 1.10 0.10 0.30 0.80 1.20
2016Q1* -0.20 0.05 0.30 -0.08 -0.05 0.00 0.10 0.40 1.00 1.70 0.20 0.60 1.30 1.80
2016Q4* -0.20 0.05 0.30 0.00 0.05 0.10 0.20 0.60 1.40 2.20 0.30 0.80 1.60 2.30
3m 13 29 44 36 16 29 35
1m 27 54 61 32 29 52 42
Now 32 65 71 38 37 62 46
2015Q4* 20 50 60 30
2016Q1* 30 60 70 30
2016Q4* 40 80 80 20
20 50 40
40 70 50
50 80 70
3m 6 9 12 24 27 61 107 107 110 1181
1m 5 17 12 29 28 63 121 116 174 1049
Now 12 24 23 43 39 86 151 150 228 1154
2015Q4* 3 5 8 20 25 40 95 90 145 900
2016Q1* 3 4 6 10 20 35 90 80 100 750
2016Q4* 2 3 4 8 10 20 50 30 80 450
5
Euro Rates Weekly - Assume brace position! - 19 June 2015
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