European interest rate implied volatility has recently hit highs last seen in January 2000. Rocketing volatility in the U.S. is driving the move, according to Meyrick Chapman, fixed income derivatives strategist at UBS in London. Earlier this month implied volatility for a three-month option to enter a 10-year swap reached 0.912. Since then it has come off to 0.85.
The rise in U.S. implied vol was triggered by unprecedented remortgaging by Main Street. This caused mortgage shops to flood into the interest rate swap market, pushing out spreads (DW, 8/4).
While both the U.S. and euro curves have seen jumps in implied vol, it is only the U.S. market which has witnessed increased trading volumes. Frederic Desclaux, global head of fixed income sales at SG Corporate Investment Banking in London, estimated trading volumes in the dollar swap have increased by 20% year-to-date.
Uncertainty over the future direction of European interest rate movements has also increased volatility. Chapman said the euro bond yield curve has flattened recently suggesting interest rates are likely to rise despite continuing weak economic data.
