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Fixed Income market briefing April 2020

Release date: 05 Apr 2020 | Eurex Exchange, Eurex Clearing, Eurex Group

Fixed Income market briefing April 2020

First and foremost, I would like to take this opportunity to express my sincere gratitude to our members for helping to provide liquidity in a thoroughly challenging first quarter. It is testament to Eurex’s broad and diverse members that we have been able to serve our customers in these unprecedented circumstances. 

Overall, the first quarter saw an increase in volumes versus Q1 2019. This was primarily driven by the sudden outbreak of COVID-19, which led to an immediate global monetary policy response, with central banks cutting rates and reinstating or reinforcing their quantitative easing measures. At the same time, European countries implemented lock-down policies to prevent further spreading.

A sharp repricing of stocks and fixed income securities followed, reflecting the changed market conditions and macroeconomic forecasts. Rates volatility catapulted higher (the annualized at-the-money implied volatility of Bund and long-BTP futures peaked at 14% and 30% respectively). The long end of the swaps curve (IRS) flattened aggressively, with Sovereign credit spreads widening considerably (10-year BTP Bund spread reached 280bps in the nexus of the COVID-19 distress) which helped to underpin volumes in our core futures and options markets.

Bund futures exhibited strong volume growth compared to last year, which was driven by the large flattening seen in 10s30s IRS (Buxl and Bund futures saw a volume increase of +46% and + 17% respectively, compared to Q1 2019). Futures on Bobl and Schatz volumes were flat on Q1 2019 (-0.1% and +2.4% respectively), as yield volatility in short-term rates remains suppressed relative to the rest of the curve. In the options space, Bunds outperformed with weekly Bund options seeing an increase Q1 (volumes are up +91% vs. Q1 2019).

The Italian segment continues to see year-on-year growth, outperforming Q1 2019 as the Italian yields experienced continued heightened volatility. Regional elections in January and, more recently, the outbreak of COVID-19 with the subsequent economy lock-down put pressure on Italian Sovereign bonds, which caused spikes in the implied and realized volatility as well as the widening of the spread to the German yields. In such severe conditions, BTP futures and options proved to be an essential tool for clients to manage their risk exposure.

The French segment continues to see robust volume development, with French OAT futures also seeing strong volume development (+21% versus Q1 2019). During the rolls, the OAT traded record volumes with over one million contracts traded. At the beginning of the month, we saw 1,030,993 contracts traded in a single day. This is really encouraging for the team as the segment grows YoY.

Fixed income ETF options also saw sustained daily trading activity in the first quarter of 2020, with more than 90k contracts traded since the start of the year, of which 50k traded in March. This is an exciting space for Eurex with further contracts listed Q1, namely the iShares USD Treasury Bond 20+yr UCITS ETF. 

During the turbulent March period, we were proud to see the stability of the Eurex infrastructure, together with the resilience and liquidity that our products afforded our members.

In March, the roll of fixed income futures proceeded smoothly amid the market turbulence. German bond futures rolled to the June expiry in line with previous quarters. Further, Italian long-BTP futures open positions rolled to the June expiry earlier than previous quarters, with more than 60% of the open interest rolled to the back contract three days before expiry.

Lastly, I would like to thank the Eurex team and our colleagues for their continued support and collaboration to ensure the smooth operating of our markets.

Lee Bartholomew, Head of Fixed Income Product R&D, Eurex


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