German Bonds Becalmed as ECB Pushes Volatility to 15-Month Low

  • Stimulus is making debt expensive, shields it from politics
  • There’s a sense of ‘wait and see’ in markets: Credit Agricole

Europe’s sovereign-bond market is caught in an August stasis.

Anticipated volatility on German 10-year bund futures has fallen to the lowest in 15 months. The European Central Bank’s bond-purchase program is shielding securities from extreme price swings by driving yields lower across the euro zone, making debt more expensive. The backstop is also smoothing out the effects of political crises in peripheral nations including Spain and Italy.

Falling Volatility
Falling Volatility

“The market is seeing policy makers making decisions that are conducive to supporting markets,” said Orlando Green, a rates strategist at Credit Agricole SA’s corporate and investment-banking unit in London. “But given that yields are already very low there’s only so much higher that bund prices can go. Markets are very much caught in between.”

Implied bund volatility dropped to 3.8 percent this week, the lowest on the basis of closing prices since April 2015, data compiled by Bloomberg show.

The last time the measure was this low it presaged a spike in debt yields, with rate on the 10-year German bund surging almost a percentage point in less than two months.

Bund yields rose two basis points, or 0.02 percentage point, to minus 0.09 percent as of the 5 p.m. London-time close, after reaching an all-time low of minus 0.205 percent on July 6. The price of the zero percent security due in August 2026 dropped 0.156, or 1.56 euros per 1,000-euro face amount, to 100.94.

“We also have a number of event risks, certainly on the periphery, in terms of policy and politics from next month, so there’s an element of wait-and-see as well,” Green said. We’re in a “summer lull.”

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