Goldman and Morgan Stanley revisit declining bond volatility

Short-term jitter
Nonetheless, some turbulence could be triggered by Thursday’s US inflation data. Analysts at Bank of America, Commerzbank AG and UBS Group AG are forecasting readings of 0.5% or more for the core month-on-month CPI, higher than the consensus forecast of 0.4%.
“The main risk is a resumption of volatility which would rattle carry traders,” said ING strategist Antoine Bouvet, predicting that the reading could be much higher or lower than expected given questions about the pace of the market. economic recovery.
He recommends suspending carry trades on the five to seven year portion of the Treasury curve, which is more sensitive to changes in monetary policy.
UBS, meanwhile, sees the impression hit 0.7%, which could send 10-year Treasury yields to year-to-date highs, said John Wraith, head of rate strategy at the United States. UK and Europe.
âGiven the recent nervousness and focus on possible inflationary issues resulting from the pandemic, this would likely trigger a jump,â Wraith said.
Morgan’s view
Others remain skeptical, not least because traders are well aware of the short-term pressures on inflation. Morgan Stanley agrees that volatility will remain subdued over the next few months, before picking up again from August.
âOur baseline scenario is that theft would trade at a slightly lower level in the near term, which is also supported by our quantitative fair value models for implied volatility,â strategists David Harris and Kelcie Gerson wrote to New York in a note last week. “However, we believe the FOMC meeting at the end of July is a risky event, as there could be early discussions on tapering.”
They recommend using what’s called a calendar spread, selling a two-month expiration volatility on 10-year rates instead of buying a five-month expiration to capture the moderate short-term outlook and increasing volatility over the three months through early November.