06 Apr 2023


Fixed Income market briefing April 2023

by Lee Bartholomew, Head of FIC ETD Product Design, Eurex

Bund-, Bobl- and Schatz-Futures continue to outperform compared to last year

The first quarter of 2023 was the tale of the unexpected, or perhaps driven by factors that were flashing warning signs largely being overlooked and underpriced. We touched upon credit risk being a catalyst for increased volatility in a previous update, albeit not expecting it to unfold as quickly as it did. What did this all mean for our business? In short, it led to a solid performance in Fixed Income & Currencies. The team has been focused on several aspects: 1) what is the medium-term impact on our business; 2) are there concrete parallels to previous significant shocks, e.g., 2008 and 3) what impact will this have on our roadmap and initiatives? This list is not exhaustive but rather a simplified overview of what we have been working on, considering, analyzing, and working with our members to figure out.

In the last update, I outlined that I would discuss our rolls in more detail. The team compiled a detailed analysis and update on the topic, which can be shared. The increased volatility in the underlying markets did bring challenges. This was most pronounced in the repo markets and was partly driven by unwinds in the front end of the curve. The roll activity in the Fixed Income Futures suite began earlier than we observed in December and September. Additionally, we saw an acceleration in the six days prior to expiry, with the cheapest-to-deliver bonds (CTD) changing during the roll period from March 2023 to June 2023 for the contracts FGBS, FGBM and FBTS. All contracts saw a marginal increase in duration after the change. In terms of volumes, the front end continues to outperform compared to last year, while the ultra-long end continues to see reduced volumes. Overall, rolled volumes were lower than in the March 2022 roll and the number of deliveries moved back up toward the average historical levels after being subdued for the last two expiries.

What did all this mean for our volumes? Futures volumes were 15.7% higher than Q1 2022. In the core German segment, the outlier was the long end of the curve, with Buxl volumes 11.1% lower compared to Q1 2022. The Italian segment continued its positive momentum, with volumes for the Long-term and Short-term contracts 9.3% and 49.6% higher, respectively. The French segment was marginally lower versus the same period last year. This is largely driven by a reduction in positioning from Asian Real Money as JGBs are becoming more attractive with the changes at the top of the BoJ. The French segment still saw c.13.7m contracts trade despite this shift.

Away from the core rates segment, our Credit contracts went from strength to strength. Volumes in the Euro High Yield Index futures traded over 27k. This is particularly encouraging given the underlying driver of the volatility: credit. Given that the segment is nascent, we expected volumes to fall off, but we witnessed the opposite and OI now stands above 10,000 contracts. The support from our clients, liquidity providers and members has been excellent, so this development is down to you. As a team, we truly believe that we can grow this segment to become a critical pillar for our business. Davide and the team have done an incredible job working with our members to achieve the underlying performance to date. It takes a team effort to develop a new asset class, and I am genuinely grateful to all our colleagues who support us in bringing our ideas to fruition. A big thank you from me; your efforts are acknowledged!

In core rates Options, the standout performance came from Weekly Bund options, which saw volumes increase by 164%. This translated to volumes of c.700k versus 267k in Q1 2022. Schatz options volumes also saw double-digit growth, 40% higher than Q1 2022. We continue to build momentum in our ETF options segment, with c.34k contracts trading in the Euro Corporate Bond and High Yield underlyings.

FX continues to build on the positive momentum of 2022. Volumes were 35% higher than Q1 2022. I have been transparent about our objectives within listed FX in previous updates. Simply put, our ambition is to be the incumbent for Euro crosses and Scandinavian currencies, and to develop liquidity in markets where we have a strong franchise; APAC and the Americas. We are committed to working with the key stakeholders to shape this segment's market structure and do so collaboratively. We believe in demonstrating and living our values; trust underpins this. Fundamentally, we believe we can be the key liquidity pool for listed derivatives that can coexist alongside OTC. With 360T, the team is focused on executing this vision while developing functionality and services that enable clients to transact seamlessly across our platforms.

The focus for Q2 is on the execution of our strategy. That is to create critical mass within our STIR, FX and credit segments. In addition to those three key pillars, we will continue to assess the best time to bring new rates products to market that complement our core portfolio, namely EU bond futures. In practice, this means we will work tirelessly with our members, clients and liquidity providers to execute this.

As always, this would not be possible without the support of our colleagues across clearing, risk, IT, sales, market structure and operations. Thank you to each and every one of you. 

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