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German Bund Futures Volatility Forecast (24/04/2011)

German Bund futures rose as we expected and stayed into the 122 euro area for the entire week but it is important to point out that most of the movement was a reflection of the fact that prices gapped up remarkably on Monday.

Specifically, the closing price was 122.4 on Monday, whilst on the 15th of April futures closed at 121.2, during Tuesday and Wednesday futures kept decreasing and touched 121.8 but 122.2 was the closing price on Thursday.

The current volatility is now fluctuating around 0.38% (6.03% annualised) which is the mean reverting point as the chart visibly displays. The conditional variance decreased significantly during the last trading days and the fact that it has now touched the bottom could probably imply that more volatility should be expected in the upcoming hours.

In particular, an increase of the volatility curve towards the 0.45% area (7.1% in annual terms) could very easily drag prices down because the major trend irremediably remains bearish.

The next week could see a sideways movement of the market with futures fluctuating within a narrow range but a short term volatility increase should push prices back into the 121 – 121.5 zone.

The HyperVolatility team is bearish on German Bund futures and we will place some shorts as soon as a good opportunity will arise. However, a stable volatility plot or unexpected macroeconomics news would obligate us to close out our positions because there is a lot of uncertainty surrounding this market.

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