Fixed Income market briefing July 2020

Overall, the first quarter saw an increase in volumes versus Q1 2019. This was primarily driven by the sudden outbreak of COVID-19, which led to an immediate global monetary policy response. Central banks cut rates and reinstated or reinforced their quantitative easing measures, while European countries implemented lock-down policies to prevent the virus from spreading further.

There were several driving factors behind the volume and revenue growth in Q1:

• Rates volatility catapulted higher (the annualized at-the-money implied volatility of Bund and long-BTP futures peaked at 14% and 30% respectively).
• The long end of the swaps curve (IRS) flattened aggressively, with Sovereign credit spreads widening considerably (10-year BTP Bund spread reached 280bps in the nexus of the COVID19 distress) helping to underpin volumes in our core futures and options markets.
• What do I mean by long end IRS? Here, I am referring specifically to the 10y-30y part of the Interest Rate Swap Curve, where there was significant interest in receiving 30y swaps, causing the yield on 30y to collapse.

What did this mean for our business? Bund futures exhibited strong volume growth compared to last year, driven by the considerable flattening seen in 10s30s IRS (Buxl and Bund futures saw a volume increase of +46% and + 17% respectively, compared to Q1 2019). Futures on Bobl and Schatz volumes were flat on Q1 2019 (-0.1% and +2.4% respectively), as yield volatility in short-term rates remains suppressed relative to the rest of the curve. In the options space, Bunds outperformed with weekly Bund options seeing an increase Q1 (volumes are up +91% vs. Q1 2019).

Now, let's look at Q2 - Major global stock index prices resurged to the beginning of 2020 levels, while implied volatility figures of U.S. and European Sovereign bonds normalized quickly to pre-crisis levels. This is especially true for France, Germany and Italy, which saw the highest spike in March (implied volatility on the 10-year point peaked at 30%).

How did our fixed income derivatives business do against this backdrop? In April and May, we saw volumes decrease as risk was taken off the table. Open interest (OI) dropped about 20% year on year (YoY). However, we did see a pick-up in volumes as we entered. The main highlights being:

• OI in FI options increased by about 600k in the first two weeks following the June expiry. June options volume was lifted by a short-term volatility increase as Bund ATM volatility breached 5%.
• In the ETF segment, iShares USD HY CB ETF saw its maiden trade of the month with more than 4,000 contracts in the first two weeks.
• Prior to June, Open interest in Bund, Bobl and Schatz futures combined is 25% lower YoY. 
• Fixed Income futures volume was mainly driven by roll activity and the June expiry.
• Delivery and expiry went well, even though repo rates in 2Y CTD tightened to -2% shortly before expiry.
• Volumes after the roll were stable but at lower levels compared to before the Corona period. In the 10Y, volume ratios were 70% in FGBL, 18% in FOAT and 12% in FBTP.
• During the first two weeks of June, SARON futures traded about 3,000 contracts in the first two expiries. Banks are slowly becoming more active in the SARON market, as the activity in the cash markets started to accelerate.

In the options space, weekly Bund options continue to see increased volumes in Q2 as well (volumes are up +25% vs. H1 2019), as well as options on BTP (+29% vs. H1 2019) and options on Schatz. The latter underperformed in Q1, which was counterbalanced by a sudden spike in volume in April and May (+11% YoY).

In June, the roll of fixed income futures proceeded smoothly amid the market turbulence. Bund futures rolled to the September expiry in line with previous quarters, showing a slight acceleration at five days before expiry, which corresponds with the volume spikes.

Further, Italian long-BTP futures open positions rolled to the September expiry earlier than historically. The same roll behavior was observed in March 2020 and December 2019, when roll volumes drastically spiked four days before expiry. There now seems to be a tendency to reduce the roll period to a lesser number of days while intensifying the roll activity.

In the credit space, fixed income ETF options continued to see sustained daily trading activity in the second quarter of 2020. Volumes in the options on the iShares $ High Yield Corp Bond UCITS ETF showed a 29% increase since 2019. We saw further trading in the European High Yield ETF options, with around 36k contracts trading. The slowly but surely increasing liquidity shown by the LP's encourages that we are firmly on the right path to establishing this liquidity pool.
 

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