Banks in Europe, led by Commerzbank, were seen snatching up receiver swaptions in size last week as prop desks and clients positioned themselves for a European Central Bank interest-rate cut this week. Traders estimated that several billion euros (notional) of receiver swaptions rolled through the market, with Commerzbank said to be behind about EUR1 billion (USD888 million) in trades. Meyrick Chapman, director, derivatives strategy at UBS Warburg, said a EUR1 billion swaption is huge in a market where a EUR200 million deal is noteworthy. Popular trades included buying the right to enter a five-year or 10-year swap in one month or six months. Implied volatility on the option to receive fixed in the five-year swap in a month shot up 100bps to 13.75% Thursday.
Traders said Commerzbank, not usually a major player in the swaptions market, bought EUR1 billion of out-of-the-money options to receive a fixed interest rate in a five-year interest-rate swap in one month. Traders speculated that the bank was positioning for an interest-rate cut, which would make options to receive fixed more valuable. The swaptions, struck at 4%, got a quick lift last week as the at-the-money option moved from 4.79% Monday to 4.74% Thursday as the market priced in an interest-rate cut. A trader at Commerz declined comment.
An interest-rate derivatives trader at Morgan Stanley Dean Witter reported interest from hedge funds in out-of-the-money one-year options to receive fixed in a one-year swap. He added these were struck between 4%-4.25%.
Eckhard Schulte, senior economist at Dresdner Kleinwort Wasserstein in Frankfurt, is anticipating a 25bps-50bps rate cut on Thursday because Italian and German inflation data which came out last week showed a fall in inflation. That gives the ECB the green light to cut rates, he added.