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Fixed Income Highlights - February 2019 Edition

Date 11/02/2019

Market briefing

A cautious start is how I'd describe the start to 2019. European Fixed Income (FI) markets have been notably quiet with a risk-off tone evident throughout. Carry trades look set to be the theme in Q1 as there is a strong correlation between market moves and absolute levels of carry (adjusted against volatility ratio's) which implies the market is positioning for future volatility. It's hard to get excited at this juncture as the underlying market is trading in tight ranges, with a low level of realized volatility contributing to weaker volumes in Eurex's core markets. Having said this, volumes at the beginning of 2018 set a high bar and January had plenty of event risk.

The conviction that the ECB may have missed its window of opportunity to raise borrowing costs is manifesting itself in euro-area FI markets. Money markets are betting that policy makers will now only raise the benchmark deposit rate in June 2020, compared with earlier expectations of September 2019. The front end of the Italian curve is steep, relative to the rest of core Europe, which is offering attractive carry and roll down. All this has helped to suppress volatility across the eurozone, with bund volatility at market lows. In the last week of January, volatility in the OTC markets saw a small bounce, but volumes remain light. Forward volatility is pricing quite close to historical levels, which implies the market thinks we could be in a low for long scenario. This could help keep volatility low.

Putting on my 'glass is half full' hat, I'm a little more optimistic, and think we need more time to see how the year ahead looks. There are enough event and geopolitical risks to keep the markets on their toes.

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

Facts & figures

Round-ups of January

Eurex reaches global pole position
Eurex is now the world's largest derivatives exchange based on Open Interest. In 2018, open interest stood at 120,467,829 contracts, an increase of 18%. This figure from the Futures Industry Association (FIA) underlines the success of Eurex's buy side initiatives.

Euro clearing post-Brexit
At the end of last year, Matthias Graulich, Chief Strategy Officer and member of the Executive Board at Eurex Clearing, addressed some of the audience's questions posed at a webinar. These questions were related to changes to organizational and technical procedures, possible costs and opportunities through change.

PGGM is the first pension fund manager to centrally clear repos at Eurex
We are pleased to welcome Dutch pension fund PGGM as the first pension fund manager to use our ISA Direct service in our centrally cleared repo markets. By using Eurex Repo, PGGM expands its spectrum of available liquidity providers significantly, minimizes counterparty risk, and reduces costs.

Access to centrally cleared repo markets for pension funds
Frank Odendall, Head of Buy-Side Repo Initiative at Eurex, speaks about the significant challenges facing European pension funds due to regulatory changes and offers a compelling new solution for pension funds, asset managers and insurance companies.

InTouch Capital Markets (ITC): extended trading hours in Asia lead to attractive alpha-generating opportunities

ITC shows how Australian versus German Fixed Income futures can now be traded. The trading hours extension allows for effective spread trading between Eurex Bund and Schatz futures, and ASX 3y and 10y bond futures.