German Bund Futures Volatility Forecast (14/08/2011)

The HyperVolatility team forecasted a further increase in the German fixed income bond market and our projections proved accurate and profitable once again although the 135 target point was only brushed by but never touched nor violated. German Bund futures opened at 133.49 on Monday, plummeted to 133.22 on Tuesday, jumped to 134.4 on Wednesday, dropped back to 133.25 on Thursday and closed at 133.04 on Friday.

The volatility is now 0.78% (12.3% annualised) and the TGARCH plot is obviously displaying a volatility curve which is “trying” to complete its mean revert process in order to settle around the long term balance point which, for the German Bund, is around the 0.4% threshold (6.3% in annual terms).

Additionally, the intervention of the ECB, which desperately bought up Italian and Spanish bonds on the secondary market in order to calm down investors and decrease the yields which were dangerously close to the 7% break point, managed to throw some water on the fire, at least in the short term.

The HyperVolatility team is bearish German Bund futures because the inverse leverage effect, and therefore the positive correlation between the price action and its volatility, will accompany a down move of the price itself. As a consequence, futures should get back to 130 by Friday and eventually break through this level.

Like the Swiss Franc, the German Bund has an inverted reaction to bad macroeconomics news. Therefore, should the market be hit with further downgrading and/or bearish figures the price could jump back up and touch the 136 – 137 zone.

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