German Bund Futures Volatility Forecast (22/08/2011)

The worst scenario profit target we gave you one week ago, that is 136, proved to be the right one. The buying pressure dramatically increased soon after Germany and France prime ministers finished their public speech whilst prices went through the roof after the US manufacturing data were released.

German Bund futures opened at 132.7 on Monday, rose to 133.4 on Tuesday, closed above 134 on Wednesday, jumped to 135.5 on Thursday and closed at 135.5 on Friday.

The actual volatility is 0.8% (12.6% in annual terms) and the TGARCH plot is evidently displaying an upward sloping curve which should increment its value over the next trading days. However, German Bund futures volatility responds inversely to equity market fluctuations (for a more detailed explanation please watch the HyperVolatility Channel on YouTube) meaning that an increase in the volatility of German’s fixed income product is highlighting a very high buying pressure that is likely to continue over the next hours.

The HyperVolatility team remains bullish on this market because the positive correlation between German Bund futures prices and volatility it is a typical process observed during market turmoil and it should not be interpreted as a warning signal. We expect the market to keep moving higher and eventually achieve the 136.5 area by Friday but short term retracements or a sideways movement of the price action, particularly in the first half of the week, are not eventualities to opt out.

Clearly, good news from Germany and US would change the overall picture and drag down the price in the 132 area but further bad figures (Home Sales, Initial Jobless Claims, GDP, etc) would literally drive the price towards the 137 area by Friday.

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