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Fixed Income market briefing September 2019

Release date: 04 Sep 2019 | Eurex Exchange, Eurex Clearing, Eurex Group

Fixed Income market briefing September 2019

First, I would like to say a big thank you to our members for their continued support in volatile markets. The French and Italian segments continue to grow, having outperformed YoY growth of the core benchmark sectors. We are starting to see our Fixed Income ETF options segment picking up and I’m excited by what we can potentially achieve in this space. Again, thank you to our members and partners for supporting us on this journey.

August was all about the global rallying of Fixed Income bonds on the prospect of further dovish monetary policy from central banks and a flight-to-safety due to increased trade tensions between the U.S. and China. Eurex saw increased futures and options volumes in, what is, the typically quiet month of August. The increase in volumes was driven by increased volatility in the underlying market as European government bonds rallied. 

Options volumes also exceeded YTD averages as at-the-money implied volatility in Bund options rose above 5% in August and reached a YTD high of 5.50% on the 19th as Bund yields fell from minus-44bps to minus-70bps across the month. There was strong interest to buy protection as we moved higher in price terms, but some were happy to take profit with the move higher. A real positive was the increased volumes executed in the central limit order book (CLOB).

Buxl futures saw volumes almost double year-on-year as German 30-year yields fell deep into negative territory. This was coupled by the flattening of the Euro Swap curve, with the long end falling 30-40bps while the short end was 4-9bps lower. The excessive bull flattening move in the 10s30s slope across EGBs and swap curves was one of the main themes of August.

Yield curves in Europe have flattened with the anticipation of 20bps of rate cuts by the ECB by year-end. The market is still anticipating a further 50-75bps cut by the Fed.

The coalition government in Italy broke down and was then reformed by the Five Star Movement and the Democratic Party. Investor's reacted positively to the events leading to a rally in Italian government bonds, 2-year yields fell 40bps and 10-year yields fell 73bps for the month, with Bund-BTP spreads falling 54bps to 150bps.

There was volatility elsewhere in the market, with the further U.S. trade tariffs coming into effect on China combined with retaliatory tariffs, and an increased threat of a no-deal Brexit as new PM Boris Johnson's government made commitments to the U.K. leaving the EU on 31 October and stepped up preparations for a potential no deal Brexit. Market volatility and risk-off sentiment has slowed investors’ hunt for yield in the credit market, with Euro and U.S. Dollar high yield spreads both rising above 400bps during August. U.S. Dollar high yield spreads ended the month 20bps higher while Euro high yield rallied in late August to end the month 10bps lower. Euro and U.S. Dollar investment grade credit spreads both rose 10bps.

Looking ahead to the rest of the quarter, I am excited by the launch of the Inter-Product Spread (IPS) functionality. It has been a great team effort to get this across the line and further iterations and enhancements are planned for the near future. Thank you to the team for all the hard work on this.

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


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