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German Bund Futures Volatility Forecast (02/05/2011)

The German Bund futures rose substantially the last week although our forecast suggested a shorting strategy. Particularly, the price opened at 122.5 euro dropped to 122.1 but then rallied to 122.9 on Friday.

The actual volatility is now around 0.41% (6.5% annualised) and the TGARCH plot is showing an upward sloping curve which seems highlighting the fact that more uncertainty could be expected in the upcoming days because the volatility is going to increase.

On the other hand, the volatility curve is now fluctuating within its equilibrium point and, unless there is a breakout of the equilibrium range, the situation could even remain stable with futures moving sideways or heading north again.

However, the clearly visible augment of volatility in the very last part of the chart is a warning signal because it accompanied an up move of futures prices and therefore more attention will be needed in the upcoming days.

The HyperVolatility team remains bearish on German Bund futures because should the volatility surpass the 0.48% threshold (7.6% in annual terms) we would see the price plummeting and retesting the 120.5 – 121 area.

Specifically, we believe that the rally we saw last week was only a temporary trend and that the volatility will soon increase and consequently drag the market back down again but a stable volatility plot will obligate us to step aside and wait for the next week.

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