German Bund Futures Volatility Forecast (27/06/2011)

Many times we mentioned the fact that the German Bund, along with Swiss Franc futures, is considered to be a safe haven for investors and traders who deposit their money in the German fixed income product all the time that water get rough in equity Indices: the last week this is exactly what happened.

The market opened at 126.1 dropped to 125.8 but, as soon as things started to get bad, the price rallied to 126.1 on Wednesday, touched 126.9 on Thursday and settled at 127.4 on Friday.

The current volatility is 0.40% (6.3% annualised) and the TGARCH plot is clearly displaying an upward sloping curve although the market increased but this is a fairly acceptable phenomenon for the Bund (watch the analysis “Volatility and Market Sentiment” on HyperVolatility channel for a better explanation).

Nevertheless, the fact that the variance increased does not mean that the price boost was steady and robust and that is why it is highly probable for the volatility to mean revert towards the 0.33% level (5.2% annualised) which is the equilibrium point.

The HyperVolatility team remains bearish on German Bund futures because the market has been “distorted” by the macroeconomics news. Consequently, the conditional variance should plummet accompanying a plunge of futures prices which should retest the 125 threshold by Friday because the more the market goes up the less stable it becomes.

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