Assume brace position

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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.

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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.

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10y DBR daily yield volatility Source: Bloomberg

Insights.abnamro.nl/en

Bloomberg: ABNM

Jan-15


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