Investor Seeks $100 Million Payoff on Bet Bund Yields to Surge

  • Options placed day after second round of French election
  • Trade makes money if 10-year bund yield climbs to 0.58 percent

After the French elections, one investor bet that German bond yields will rise to the highest since early 2016 -- for a payout of 100 million euros ($109 million).

The victory of Emmanuel Macron in the second round of French voting prompted a heavy day of market activity in bund futures options, with over 450,000 trades taking place -- around twice the average of the previous seven days. Even so, that one trade made up around a fifth of the day’s action.

The deal, between anonymous parties, was executed using options on bund futures, with Eurex data showing an expiry on June 23, two weeks after the European Central Bank’s next meeting. That suggests it may be a wager on the ECB striking a more hawkish tone now that regional political risk has waned and inflation on the continent is picking up.

“You had this big political risk that was the French Presidential election, which kept the market under pressure and risk aversion quite high,” said Elia Lattuga, a fixed-income strategist at UniCredit SpA in London. “The market can now reposition to being a bit more data dependent.”

Haven Asset

The purchase of 40,000 put options, with a strike price of 159.50, would start reaping rewards if German 10-year yields rise toward a target of 0.58 percent, from around 0.44 percent now, according to bond traders in Europe, who asked not to be identified as they weren’t authorized to speak publicly.

The cost to do the trade was around 3.2 million euros. To reduce the premium paid, the investor also sold 40,000 call options with a strike price of 165.00, which equates to roughly a drop to a yield of 0.21 percent, the traders said. The bet could also lose the trader 120 million euros if the strike is hit, assuming there’s no hedge.

German debt has been the biggest beneficiary of the ECB’s bond-buying program since it began in 2015. The securities are also seen as a safe asset at a time of heightened political risk, rallying as the chances of a Marine Le Pen victory, or a run-off between Le Pen and far-left candidate Jean-Luc Melenchon, looked more likely. With the result now out of the way, political risk may remain muted until Italy goes to the polls in 2018.

The period of the option also covers euro-zone inflation data, which could show a further tick upwards in core inflation, adding an incentive for the ECB to begin tapering sooner rather than later. German Finance Minister Wolfgang Schaeuble said Tuesday that ECB communication suggests interest-rate developments will “start to normalize shortly.”

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