Biggest Bund Rally Since 2016 Looks Like Unfinished Business

(Bloomberg) -- The biggest German bond rally in four years may have further to go, according to derivatives pricing.

Demand for options betting on bund gains continued to outpace the equivalent bearish positions Monday, extending a trend that gained momentum throughout last week. It has pushed the premium on one-month call contracts over puts to levels unseen since May 2018. A similar three-month gauge is indicating the most bullish sentiment since September.

German bonds have surged this year as investors sought safety in top-rated government debt, with the widening coronavirus outbreak undermining already-fragile global economic prospects. Ten-year bund yields tumbled 42 basis points over the last two months, the biggest such slide since the period through February 2016. They slid a further five basis points Monday to -0.66%.

The rally was also fueled by growing expectations that the European Central Bank will ease policy to cushion the euro-area economy against the impact of the virus outbreak. Money markets are currently fully pricing in a 10-basis-point interest-rate cut as early as April.

The bund option skew has steepened further Monday led by out-the-money call options Monday, from levels late last week, adding to signs that investors are positioning for more gains. Volatility has increased for both puts and calls.

The rise in German bond volatility reflects a similar trend across the Atlantic. The ICE BofA MOVE index, which tracks the implied volatility in U.S. Treasuries, jumped to 109.7, the highest level since September 2013.

To contact the reporter on this story: Anil Varma in London at avarma3@bloomberg.net

To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Hunter, Neil Chatterjee

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