Volatility Drop in Euro Bonds Suggests Investor Caution About QE

  • Price swings fall to lowest in two months, even as bonds rally
  • ECB officials seen giving mixed messages about more stimulus

Market observers assuming this week’s bond rally reflects confidence the European Central Bank will expand monetary stimulus should take a look at volatility.

Implied price swings on futures for 10-year German bunds fell to a two-month low on Friday, suggesting investors are showing caution by sitting on the sidelines of the market before the bank’s Oct. 22 policy decision. That’s in contrast to before ECB President Mario Draghi announced quantitative easing in January, when the measure jumped to the highest in more than a year.

Bund Futures Volatility Falls
Bund Futures Volatility Falls

“If there are people out there who think Draghi will provide a clear hint” on extending QE, “they will be disappointed,” said Martin van Vliet, ING Groep NV’s senior interest-rate strategist in Amsterdam.

ECB officials have given mixed messages about the prospects of more QE this week.

Ewald Nowotny said Thursday inflation is “clearly” undershooting the central bank’s targets, which some took as a sign the chance of new measures is increasing. It’s too early to discuss more QE, his colleague Benoit Coeure said in an interview on CNBC broadcast Monday.

The measure of anticipated price swings in bund futures 60 days from now fell to 5.1 percent as of the market close at 5 p.m. London time on Friday, the lowest since Aug. 7. The gauge jumped to 6.6 percent on Jan. 21, the highest since 2013.

European bonds rose in the week. The yield on Germany’s 10-year securities dropped seven basis points, or 0.07 percentage point, to 0.55 percent, while Spain’s slipped six basis points to 1.77 percent.

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