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Fixed Income Highlights - Q1/2017 Edition
Fixed Income Highlights - Q1/2017 Edition
Market Briefing – Fixed Income & FX
The first quarter 2017 delivered European fixed income markets a strong start to the year.
As a result, across its core and periphery derivatives markets, Eurex experienced strong demand and a robust uptick in client activity to underpin a firm foundation of volume and liquidity. More broadly, European markets have benefited from a supportive macroeconomic environment, where geopolitical and event risks have driven a pick-up in investor demand since late 2016.
European markets have had a respectable amount of event risk to absorb in the first quarter and though the overall level of euphoria surrounding some of the event risk has declined somewhat since the start of the year, government bond spreads remain elevated. Open interest (OI) in the French Euro-OAT Futures reached record levels but French/German 10y spreads have remained reasonably stable around 65bps. And although the ratio between the CAC40 and DAX® implied volatility has declined, 1 month Bund volatility remains elevated as the underlying realizes.
It appears that the OAT/Bund spread is lagging relative to volatility measures in equity markets commensurate with the stabilization of geopolitical risks. Additionally, with the support of our members we successfully relaunched Options on Euro-OAT Futures where traded volumes have been steadily increasing. In light of the US Fed hiking rates in March as expected, the rates market seems to be pausing for breath and closely monitoring data. Re-inflationary pressures persist with core European inflation surprising to the upside. This, together with a supportive macroeconomic environment, suggests Q2 may be anything but dull.
Lee Bartholomew | Head of Fixed Income & FX Product R&D
Facts & figures
Because further US interest rate hikes are on the horizon and an end to quantitative easing looms, demand for market instruments to hedge risk has been growing strongly in the first quarter. Hedging needs are driven by open questions and events– like the number of Federal Reserve rate hikes in 2017, the European Central Bank’s next monetary policy steps or the upcoming round of elections in France and Germany.
This market environment helped bring about an overall robust result for the first quarter. The French/German 10y spreads have remained reasonably stable around 65bps. Eurex has seen particularly strong investor interest in French government debt, but also in the periphery markets products such as the Bono (+ 74%) or the Short-Term Euro-BTP Futures, that outperformed Q1/2016 by 68%. On the long-end of the curve, the Euro-Buxl® Futures continued to grow after a record year in 2016. The Euro-Buxl® Futures contract is up by 47% on a quarter-to-quarter comparison.
On 13 March 2017, Eurex relaunched its Options on Euro-OAT futures (OOAT) providing market participants with an efficient hedging tool for French rate volatility.
Following the continuously increasing trading volumes and open interest of Euro-OAT Futures, Eurex’s OOAT contracts are an additional tool to allow investors and other market participants to navigate through volatile times. Initially launched in September 2013, Options on Euro-OAT Futures are designed similarly to Euro-Bund options, but with finer strike price increments of 0.25 points.
The new Market Maker scheme is in place until 31 December 2017. Furthermore, the minimum block size has been reset to 500 lots.
The relaunch of the OOAT and the very positive volumes have been mirrored with record volumes and open interest in the underlying, the Euro-OAT Futures. In March alone 4.5 mn contracts were traded, an increase of 74%. With 12,116 traded OOAT contracts and an OI of 11,224 in just 15 business days, the OOAT has reached solid volumes of its own.
In this interview, Jamie Cassidy shares his thoughts on European fixed income options, current market opportunities and discusses whether market volatility today is the result of the upcoming elections across the Eurozone or rather the result from prevailing macroeconomic factors. This article reveals Susquehanna’s thoughts on the longevity of options on Euro-OAT futures and sheds some light on their take on the market, current products and what is in for investors in general in today’s market.
Public Quantitative Disclosures (PQDs) are an internationally agreed format defined by CPMI-IOSCO with the intention of enhancing CCP market transparency. Together with publically available market data information and CCP rulebooks that outline the relationship between a CCP and clearing members, the PQDs enable regulators, market participants, academics and the public to gauge, compare and evaluate centrally cleared markets, a CCP’s systemic importance and their respective risk management standards. The CPMI-IOSCO format is quite comprehensive with more than 200 data fields to interpret and digest.
With the latest disclosure, Eurex Clearing now begins a series of commentary to highlight key trends, discuss current topics and to shed some light on selected data points.
KfW, Germany’s promotional bank and a public sector entity under EMIR commences central clearing of its Euro denominated interest rate swaps via Eurex Clearing in Frankfurt. Although being exempted from this requirement, the bank has decided to clear voluntarily to increase settlement efficiency of the transactions it uses to hedge against interest rate changes. „With KfW we won an additional and very important member for our service EurexOTC Clear“, says Erik Müller, CEO of Eurex Clearing.
Over the last couple of months, demand for clearing services of over-the-counter derivatives rose significantly. Swap volumes cleared by EurexOTC Clear continue to grow as Eurex Clearing recorded an increase of 28 percent since the beginning of the year. The notional outstanding has now risen to more than 1,200 billion Euro.
In terms of Notional cleared, EurexOTC Clear cleared almost 158 bn Euro notional in March, setting a new mark. This increases the monthly ADV to 6.87 bn in March.
Eurex will be present at numerous events and trade fairs during the year. Please visit our website for an overview of upcoming conferences.
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