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German Bund Futures Volatility Forecast (21/06/2011)

The 126 threshold was reached and violated but the price action does not seem to be as robust as someone might think. Specifically, the price opened at 125.8 rose to 126.3 on Wednesday, topped at 126.5 on Thursday and closed at 126.2 on Friday.

The actual volatility is 0.37% (5.8% annualised) and the TGARCH plot is displaying a very stable curve which is still fluctuating within the equilibrium point which is 0.35% (5.5% in annual terms).

It is worth pointing out that most of the buying pressure has been caused by the great concerns regarding the Greek sovereign debt because many fund managers and bond traders are now using German Bund futures as a hedge against their Greece bonds exposure.

The volatility is still very low and it is quite probable that a mean reverting movement could change the situation in a matter of a few hours. Particularly, the fact that the 126 remains a very strong resistance and the fact that the conditional variance has been too low for too long are very important warning signals.

The HyperVolatility team is bearish German Bund futures because the above mentioned factors should push the price back into the 125 zone by Friday.

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