Eurex Exchange: Fixed Income Highlights

Market briefing

Starting the year off with good momentum is always a step in the right direction and last year was a good year for Eurex across Fixed Income. The standout performance of the year was the Italian BTP segment where the short-term Italian futures alone saw a volume increase of 48.6%. H1 2018 saw average daily volumes (ADV) for the ten and two-year BTP futures of 130,269 and 70,639 contracts respectively. None of this would have been achievable without the continued support of our members. The success is testament to those liquidity providers and clients. I am thankful for their ongoing support, which allows me to look forward to 2019 with even more energy and optimism.

In 2019, it is likely that the same thematic trends will continue to dominate Fixed Income trading. BTP pricing is showing signs of holding redenomination risk premia. Geopolitical risks and trade tensions between the US and China will continue to influence the front end of the curve, spreads and asset swap levels. It will be interesting to see if the cash markets continue to realize more than the swaps market, as this will be a factor in determining whether we are able to break out of the 4%-6% corridor in Bund volatility. A reduction in supply should be supportive of Eurex's overall core markets as investors will have a lot more to consider in terms of duration. Yield dynamics are skewed to the upside, but how far and quickly they go will determine whether the market has entered a year of increased volatility within European Fixed Income. Investors' eyes are closely monitoring the equity and debt markets for signs of stress and directionality.

Overall, we saw a robust performance across the volatility segment, with the exception of Bobls as the medium part of the curve lagged the front end. In the first half 2018, ADV in Bund options was 189,949 contracts. In the same period, ADV in Italian BTP options stood at 4,250 contracts and doubled that in H2 to 8,896 contracts. Volatility remains heavily directional and it is clear from the macroeconomic picture that Fixed Income markets are taking their direction from equities and geopolitical event risks. Central Banks have acknowledged that data remains skewed to the upside with inflationary pressures seeping into prices but are capped by external factors. Economic data across Europe continues to highlight that Europe is in better shape than market pricing might suggest. In the first half of 2018, Eurex volumes were underpinned by political uncertainty linked to Italy. This saw government bonds spreads widen, but more importantly became directional which helped to drive volume growth in our futures.

From a product perspective, it has been a busy time for the team having introduced a number of new segments in the past two years. Last year was a year to consolidate the hard work of 2017 and build the volume development of the new products. Given the growth in Fixed Income ETFs over the past few years, we saw a strong start to 2018 with 3,246 contracts trading. This is a segment that Eurex is committed to growing within Europe with our members. The Corporate Bond Index Futures have taken a bit longer to develop, but we have started to see small volume development towards the end of the year. The support that we have had in this space is greatly appreciated. I expect to see this evolve positively in 2019 as we develop credit within our ecosystem. In October, the team launched SARON futures, a contract that complements Eurex's existing product suite and positions the business for further growth opportunities.

Themes to watch in 2019:

Fed expected to hike rates further in 2019 albeit not as fast as the market had hoped
As the ECB reduces supply, yields are expected to increase (changed supply/demand dynamics)
Yields curves are expected to steepen in 2019 across the G7 currencies
With the overhang of the Brexit and Italian budget discussion, European volatility could spike more often in 2019
Brexit. Will it or won't it happen? And if so, at this stage, it's anyone's guess in what form.
Relatively supportive macro backdrop: strong cyclical growth, easing fiscal policy, end of regulatory drive and only moderate tightening of monetary policy.

I wish all of our members a prosperous 2019!

Lee Bartholomew, Head of Fixed Income Product R&D, Eurex

Facts & figures

Round-ups of the year 2018

BTP yields continue to drive Euro-BTP volume

2018 was the year of the BTP Options. Since the launch of Options on Euro-BTP Futures (OBTP) in 2017, we have seen dramatic growth in volumes, buoyed by uncertainty across Italy's political landscape. The contract traded 1,717,815 contracts in 2018 and open interest peaked at 106,000 contracts. Three market makers are actively quoting on screen as well as providing liquidity in the off-screen market. 6.5% is traded on screen and 93.5% in blocks.

Eurex launched the First exchange-traded SARON® Futures globally

	Regulatory pressure, along with ongoing issues regarding LIBOR, has created the need for alternative risk-free reference rates (RFRs). In Switzerland, the National Working Group (NWG) has proposed SARON® as an alternative interest rate benchmark. To help the market with an orderly transition to the new benchmark, Eurex has launched a Three-Month SARON® Futures contract, the first exchange-traded SARON® Futures globally, in October 2018. Read more.

Regulatory pressure, along with ongoing issues regarding LIBOR, has created the need for alternative risk-free reference rates (RFRs). In Switzerland, the National Working Group (NWG) has proposed SARON® as an alternative interest rate benchmark. To help the market with an orderly transition to the new benchmark, Eurex has launched a Three-Month SARON® Futures contract, the first exchange-traded SARON® Futures globally, in October 2018.

FTSE Mondo Visione Exchanges Index:

Eurex Exchange: Fixed Income Highlights – January 2019 Edition