Historic Rate Repricing Is Crushing Those With Convexity/Gamma Exposure

Zero Hedge | 8/17/2019 | Staff
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On Thursday evening, we laid out a quick lesson in bond duration but especially convexity: the Austrian 100 Year bond, to wit.

And while this is of course great news for anyone who was long the Austrian century bond - or any other bond with extended duration - it is terrible news for those who were short rates, such as virtually everyone who listened to sellside research for most of 2018 and much of 2019.

Convexity - Exposure - Topic - Note - Mizuho

It is this convexity exposure that is the topic of the latest note of Mizuho rates strategist Peter Chatwell who writes this morning that "Convexity repricing has increased the potential of € carry trades."

Below we excerpt from his note.

Repricing - Rates - Vigor - Week - Trading

The dramatic bullish repricing of global rates continued with vigor this week, with 30Y UST trading as low as 1.91% intraday. This is a massive repricing of duration, which we have been advocating since Q1 of this year, and the pace of the move has made an impact on those with convexity/gamma exposure. The classic convexity hedging trades have been evident all week – long-end swap spreads are tighter in most currencies and the 10s30s curves have accelerated their flattening.

The convexity repricing is a particularly strong indicator that this move has a fundamental basis behind it. Moreover, as equity markets have weakened this week, it is evident that markets are reflecting elevated global recession risks. The manufacturing sector in the US and Germany are likely to already be in recession and, with Germany’s Q2 GDP having printed at -0.1% QoQ, the weakness of soft data are now being confirmed by the hard data, allowing markets to price recession risks much higher. The...
(Excerpt) Read more at: Zero Hedge
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