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
30
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
2
Euro Rates Weekly - Crisis-level volatility - 15 June 2015
BTP volatility has fallen, particularly compared to Bunds
Volatility in 10y OATs is lower than in the crisis years
The graph below shows the daily volatility of 10y BTPs. The
In bps
graph indicates that the current volatility in 10y Italian bonds,
40
contrary to Bunds, is much lower than in the Eurozone debt crisis years. The drop in volatility coincides with Mr Draghi’s pledge to do “whatever it takes” to save the euro in July 2012.
30 20
In addition, the data also suggest that QE has had a soothing effect on volatility in BTPs. As a result, the gap between
10
outright yield movements between Italian and German bonds has decreased significantly (the same applies to daily volatility
0 Jan-07
in 10y SPGBs versus Bunds).
Jan-09
Jan-11
Jan-13
Jan-15
10y OAT daily yield volatility
Volatility in 10y BTPs has decreased significantly
Source: Bloomberg
In bps
80
Volatility in DSLs is still high 60
In bps
40
30
25
20 0 Jan-07
20 15
Jan-09
Jan-11
Jan-13
Jan-15
10y BTP daily yield volatility Source: Bloomberg
10 5 0 Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
10y DSL daily yield volatility
Volatility in 10y DSLs and OATs is roughly the same Volatility in 10y DSLs and OATs are showing similar trends,
Source: Bloomberg
although the levels at which they started were different. The first graph below shows the daily volatility of 10y OATs. The graph suggests that, as for BTPs, the daily yield volatility has
Volatility in 10y OATs and DSLs is analogous
decreased and is lower than in 2011-2012. The second graph
In bps
covers the same period but now for 10y DSLs. This graph
20
shows that, like Bunds, daily volatility is only marginally lower than in the crisis years. What is more, the daily volatility of 10y DSLs is currently around the same absolute level as 10y
10 0
OATs. This pattern is depicted in the third graph. The smaller difference between outright daily yield movements in DSLs and OATs is most likely a combination of QE and better means to hedge French delta risk as the OAT future was introduced in
-10 -20 Jan-07
Jan-09
Jan-11
Jan-13
DSL - OAT daily volatility
April 2012. Source: Bloomberg
Jan-15
3
Euro Rates Weekly - Crisis-level volatility - 15 June 2015
Supply overview About EUR 18bn will flow back to investors. The lion share consists of Italian coupon payments and redemptions. Gross supply is estimated to be around EUR 15bn, which means there will be negative net supply of around EUR 3bn. Next week, Germany, Spain and France will test the primary market conditions. Germany will go first on Wednesday with the tap of the DBR February 2025 for EUR 3bn. Spain will follow on the next day, but no details have been disclosed yet. France will also auction on Thursday. The French Tresor will auction the OAT February 2018, October 2019 and May 2020 for a combined target of EUR 8.5bn.
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 0.03 -0.23 -0.10 0.25 0.72 0.09 0.29 0.64 1.04
1m -0.20 0.05 0.30 -0.09 -0.05 -0.01 -0.20 0.11 0.68 1.31 0.11 0.42 0.95 1.38
Now -0.20 0.05 0.30 -0.12 -0.06 -0.01 -0.18 0.17 0.86 1.56 0.16 0.56 1.19 1.65
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 14 34 48 39 20 36 40
1m 30 57 63 27 31 53 43
Now 35 69 71 33 40 63 47
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 0 4 6 21 25 49 88 90 89 1020
1m 6 18 13 29 30 69 117 116 172 1022
Now 10 24 19 39 38 84 137 140 218 1067
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
4
Euro Rates Weekly - Crisis-level volatility - 15 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
-135 21 -115
Start date 2/4/2015
Entry 37
Now 85
PnL -49
Buy DBR August 2046
2/4/2015
-28
-7
-21
Buy DBR August 2046 vs Sell DBR February 2025
2/4/2015
60
71
-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
51
-7
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
139
-28
ASW
We judge a Grexit will not occur, which would support tightening of EFSF bonds.
Buy EFSF July 2044
2/13/2015
4
16
-12
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
26
-4
Buy OBL April 2020 vs Sell June 2017
5/7/2015
29
34
-5
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
Key events Day
Date
Time
Country
Monday Monday Monday Monday Monday Monday Monday
15/06/2015 15/06/2015 15/06/2015 15/06/2015 15/06/2015 15/06/2015 15/06/2015
08:30:00 11:30:00 14:30:00 15:15:00 15:45:00 16:00:00
IN RU US US EC US RU
Tuesday Tuesday Tuesday Tuesday
16/06/2015 16/06/2015 16/06/2015 16/06/2015
08:00:00 10:30:00 11:00:00 14:30:00
Wednesday Wednesday Wednesday Wednesday Wednesday
17/06/2015 17/06/2015 17/06/2015 17/06/2015 17/06/2015
Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday Thursday
18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015 18/06/2015
Friday
19/06/2015
Key Economic Indicators and Events
Period
Latest outcome
Consensus
Wholesale price index - % yoy May Key rate % Jun 15 Empire State PMI - Manuf. general business conditions - index Jun Industrial production - % mom May ECB publishes weekly QE details NAHB home builders' confidence index Jun GDP - % yoy 1Q P
-2.7 12.5 3.1 -0.3
-2.5 11.5 4.9 0.2
54.0 -2
55.0 -2
DE GB DE US
CPI - % yoy CPI - % yoy ZEW index (expectation economic growth) Housing starts - % mom
May F May Jun May
0.7 -0.1 42 20.2
0.7
01:50:00 10:30:00 10:30:00 11:00:00 20:00:00
JP GB GB EC US
Merchandise trade exports - % yoy Claimant count unemployment rate - % Change in claimant count - thousands Core inflation - % yoy Policy rate - %
May May May May F Jun 17
8.0 2.30 -12.6 0.9 0.25
09:30:00 09:30:00 09:30:00 09:30:00 10:00:00 10:30:00 14:30:00 14:30:00 14:30:00 14:30:00 16:00:00 14:30:00
EZ NL CH CH CH NO GB US US US US US US
Eurogroup meeting about Greece Consumer confidence - index SNB 3-month ibor lower target SNB 3-month ibor upper target SNB Sight Deposit Interest rate Policy rate - % Retail sales - % mom Inflation excl food and energy - % mom Inflation excl food and energy - % yoy Inflation (CPI) - % mom Inflation (CPI) - % yoy Philadelphia Fed - business confidence - index Initial jobless claims
Jun Jun 18 Jun 18 Jun 18 Jun 18 May May May May May Jun
2.0 -1.25 -0.25 -0.75 1.3 1.2 0.3 1.8 0.1 -0.2 6.7 279k
JP
Policy rate - %
Jun 19
80.0
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
39 -3.4
ABN AMRO
11.5
56.0
37 -2.5
2.6
0.9 0.25
0.25
-1.25 -0.25 -0.75 1.0
-1.25 -0.25 -0.75
0.2 1.8 0.4 0.0 7.5
0.2 1.8 0.4 0.0
80.0
80.0
5
Euro Rates Weekly - Crisis-level volatility - 15 June 2015
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