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Movements in Italian bond yields attract investor interest in BTP derivatives

Release date: 10 Aug 2018 | Eurex Exchange, Eurex Clearing

Movements in Italian bond yields attract investor interest in BTP derivatives

At the end of July, the new Italian coalition government again tested debt markets. First, indications were given that the Finance Minister would be replaced. This led to a renewed increase in 10 year Italian bond yields, which rose to 2.78 percent from 2.46 in mid-July and then further to 2.96 percent in the first week of August. Implied volatility in BTP options jumped again from 8 to 12 percent within days. Shortly thereafter, the Italian Treasury announced the possibility of repurchasing debt that would support price stability and take pressure off rising yields. This stabilized yields and implied volatility has fallen to 9 percent for at-the-money levels – almost as fast as it had increased.

Above average trading volumes

These strong fluctuations in yields were accompanied by above average trading volumes as the market found the liquidity needed to navigate these developments via the Italian bond futures and options suite of products at Eurex.

Yields on 2-year Italian debt, however, have followed a somewhat different pattern than the 10 year segment. After rising strongly in May and June marking levels above 1.5 percent, yields on 2-year bonds retracted from their highs down to 0.5 percent, and then back up to 1 percent in the first week of August. Overall, the yield curve has flattened over the past two months, also fuelling trading interest in Eurex’ 2-year Italian bond futures segment.

BTP options on the rise

Against this background, the BTP options, which were introduced in October, also met with strong demand. With the support of three liquidity providers, volume grew to an average daily volume of 5,100 contracts in HY1 2018 from 1,500 contracts in 2017. Open interest topped 100,000 contacts for the first time in May. Clients view the product launch positively and see the new products as complementary to the existing fixed income product offering of futures on 2 and 10-year BTP futures that traded 66k and 120k daily volume in 2018.