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Fixed Income market briefing January 2020

Release date: 03 Jan 2020 | Eurex Exchange, Eurex Clearing, Eurex Group

Fixed Income market briefing January 2020

I would like to start this year’s message much the same as last years, by thanking our members for their continued support throughout 2019. Your support is genuinely appreciated, and you have helped to contribute to the success of the Fixed Income Franchise. Furthermore, I’d like to extend my gratitude to my team and internal stakeholders, who have worked hard this year to bring new functionality and products to our platform.

As 2019 ended, there was a pause and time for reflection. For European markets overall, the performance versus 2018 was somewhat mixed in the Fixed Income space. We saw OTC volumes grow with core benchmark futures underperforming vs 2018. The year was characterized by low realized volatility as rates moved back into negative territory as the ECB cut rates and restarted its quantitative easing program. Despite low levels of volatility, bund option volumes saw a 6% year on year (YoY) increase and weeklies contributed to this growth. The Italian and French segments continued to see volumes increase YoY which is testament to tremendous support we have had for the products. I expect to see these segments continue to expand in the years ahead. August and September saw increased volumes at a time when yields hit their lows in Europe and the 2y10y sector of the U.S. yield curve inverted. Other noteworthy developments were the FIC ETF options sector, which saw volumes develop. This is a sector that is being developed for the long term and helps position the portfolio for structural growth. 

Looking more broadly, at the start of the year there were expectations that the ECB would seek to raise rates in 2020, these expectations changed dramatically with the market pricing in 20bps of rate cuts in 2019 at one point. The ECB cut its deposit rate 10bps in September and restarted QE. German 10-year yields started the year at 24bps and reached a low below minus -70bps in August when the market was pricing in the potential for a 20bps rate cut by the ECB. 10-year yields ended the year at minus -19bps, rising as expectations of further ECB rate cuts fell and risk-on sentiment rose from positive U.S.-China trade sentiment.

2020 has certainly started with a bang from a geopolitical risk perspective, which indicates further tensions throughout the course of the year. Geopolitical risks continue to weigh on market sentiment, but should these subside, then the focus should shift to the U.S. elections. I don’t have crystal ball to predict where the year ahead goes, but short term, the trend appears to be a further continuation from 2019. The U.S. election and seasonal effects should put some initial downside pressure on yields in Q2/3. For European markets, much of the same is being priced in near term, with all eyes firmly on Brexit. In order to see a pick-up in yields in the core benchmarks, a number of things would likely need to happen; no geopolitical risks from EU/US tariff war, growth in core and periphery Europe to be above consensus and inflation to pick up above 1%. 

From a product perspective, the development of our ETF options segment is something that I am excited about. The team has done a great job in getting this off the ground and our focus is on working with our members and end clients to establish this market in Europe. By having the support of on-screen market makers (MM), we are well positioned to execute on this. Further functionality will be introduced by the team, which will help to develop our products and markets.

This leaves me to wish all of our members and clients a prosperous 2020!


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