Crisis level volatility

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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

Crisis-level volatility

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.

15 June 2015    

We assess whether current bond volatility is not exceptionally high, as Mr Weidmann suggested Current volatility in Bunds compares to levels seen in the Eurozone debt crisis and Lehman fallout Volatility in peripheral bonds has decreased on the back of QE and the ECB’s pledge in 2012 The gap in volatility between 10y DSLs and OATs has decreased and is currently at similar levels

And the supply monitor:  Germany, France and Spain will test the primary market. Net supply is negative at EUR 3bn. Mr Weidmann’s bold statement on volatility Since Mr Draghi’s bombshell comment that investors should get used to volatility, various members of the Governing

as the average of 2014. So volatility has gone from low levels to very high levels, rather than just returning to normal.

Council have stepped in the limelight to also give their views

Bund volatility is comparable to the crisis years

on this topic. Bundesbank president Mr Weidmann said that

In bps

“the current level of bond-market volatility is not exceptionally high. Indeed, it has been unusually low over the past year”. To us, this is quite a bold statement. Especially as we have argued on several occasions that QE has led to significantly

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20

lower liquidity in bond markets and that this lesser liquidity 10

would lead to higher volatility. Volatility in 10y Bunds is equal to the crisis years

0 Jan-07

Jan-09

To assess whether volatility in current markets is high from a

Jan-13

Jan-15

10y DBR daily yield volatility

historical perspective, we have plotted the difference between the daily high and low yield of several generic 10y bonds. The

Jan-11

Source: Bloomberg

results are discussed and shown below.

Volatility in Bunds has spiked since April of this year The first graph plots the intraday yield volatility of 10y Bunds

In bps

and shows that the current volatility is comparable to market

25

conditions at the height of the Eurozone debt crisis years and

20

the period around the Lehman collapse. This suggests that the

15

current level of volatility is consistent with highly stressed periods in recent history. In the second graph, we zoom in on

10

the period 2014 - 2015. The data shows that daily volatility in

5

2014 has been relatively stable. It also shows that volatility in

0 Jan-14

2015 decreased and even dipped as yields reached historical

Apr-14

Jul-14

as yields surged, daily volatility has also sharply increased. To

Insights.abnamro.nl/en

Jan-15

10y DBR daily yield volatility

lows at the beginning of April. But the graph also indicates that compare, current daily yield changes are almost 4 times higher

Oct-14

Source: Bloomberg

Bloomberg: ABNM

Apr-15


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