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Thursday, February 08, 2024

Euro Buxl Prices Near Decade Lows: A Strategic Insight

تم إعداد هذا المنشور من قبل سنشري للاستشارات

Euro Buxl Prices Near Decade Lows: A Strategic...
Pair Trade Analysis -T-Bond Ultra and Euro Buxl

*Trading in financial market carries risk and can result in loss of capital.
*This performance is only observed with historical backtests and not traded by the company.

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The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and the use of leverage involves a significant risk of loss, which can exceed deposits. Please read the complete Disclaimer carefully.

The calculations and analyses provided do not consider fluctuations in exchange rates, which can impact trades either positively or negatively. Past performance is not indicative of future results.

Euro Buxl: Product Details

The Euro Buxl futures are a natural complement to the EU bonds market, offering traders and investors a direct means to manage their long-term interest rate risk and portfolio duration. Euro Buxl futures ("Buxl”) consist of cash Euro bonds with approximately 30 years remaining until maturity. This product is available on both Century and TradeUltra platforms.

Euro Buxl Contract Specification

Underlying Euro 30-Year 4% Bond
Contract Size EUR 100,000

Source: Bloomberg
Date: 7th Feb 2024

Generic Euro Buxl Price Chart

Source: Bloomberg
Date: 7th Feb 2024

Euro Buxl prices are currently hovering around €134. Over the past decade, the lowest recorded price was €119.58, reached on 10/06/2023, while the highest was €228.76, reached on 10/30/2020. As depicted in the chart above, Buxl is currently trading near the lower end of the range with €120-125 zone offering crucial support. This presents a promising opportunity, with the next significant resistance expected in the €160-170 range followed by the psychological level of €200. Additionally, Buxl exhibits an average daily trading range of €2.75 points a day, translating to over 2% of daily volatility.

Regression Analysis

Regression analysis is a useful tool to assess the strength of relationships between different variables and for modelling how these relationships will evolve in the future. The model below is used to forecast the movement in the Euro Buxl’s price when the 30-Year German Government yield changes.

As on Feb 07, 2024, the regression equation over a 1-year time-period is as follows:

Y = -27.63 X + 205.527

The standard deviation of error is 0.904 and the study assumes a 99% confidence interval.

Change in Yield Estimated German
30-Year Government
Bond Yield
Estimated
Euro Buxl Price
Estimated % Change
in Euro Buxl's Price
Current Levels 2.53% €133.75 Base Case
Decreases by 50 bps 2.03% € €147.33 10.2%
Decreases by 100 bps 1.53% € €161.25 20.6%
Increases by 50 bps 3.03% € €119.48 -10.7%
Increases by 100 bps 3.53% € €105.55 -21.1%

Source: Bloomberg
Date: 7th Feb 2024

The table above demonstrates the inverse relationship between the Euro Buxl’s price and the 30-year German Government bond yield. If the yield declines by 50 bps to 2.03%, the bond price is projected to rise to ~ €147. Conversely, if the yield increases by 50 bps to 3.03%, the bond price is expected to fall to ~ €119.

Scenario Analysis

The table below demonstrates the impact on the price of Euro Buxl under four scenarios – a 50-bps & 100-bps increase or decrease in the yield with and without leverage.

Note – The EUR/USD exchange rate as of 07 Feb 2024 is 1.0735.

Euro Buxl

No Leverage With 2x leverage
Scenario Current
Price*
Amount
Invested
Estimated Price
of Euro Buxl
No of
Units
Potential
Profit/Loss
Estimated
Payoff
No of Units
with 2x lev
Potential
Profit/Loss
with 2x lev
Estimated
Payoff
with 2 x lev
Scenario 1
Yield decreases by 50bps
€133.75 $1,000,000 €147.33 6,930 $101,083.54 10.1% 13,860 $202,018.29 20.2%
Scenario 2
Yield decreases by 100bps
€133.75 $1,000,000 €161.25 6,930 $204,672.84 20.5% 13,860 $409,196.89 40.9%
Scenario 3
Yield increases by 50 bps
€133.75 $1,000,000 €119.48 6,930 -$106,095.06 -10.6% 13,860 -$212,338.91 -21.2%
Scenario 4
Yield increases by 100 bps
€133.75 $1,000,000 €105.55 6,930 -$209,684.36 -21.0% 13,860 $419,517.50 -42.0%

Source: Bloomberg
Date: 7th Feb 2024

For a $1,000,000 portfolio with 2x leverage, a 50 bps decrease in the 30-Year German Government bond yield could result in a potential gain of ~20% per annum, equivalent to $202K. On the contrary, a 50 bps increase in the 30-Year German Government bond yield could result in a potential loss of ~21% per annum, or $212K.

For a $1,000,000 portfolio with no leverage, a 50 bps decrease in the 30-year German Government bond yield could result in a potential gain of ~10% per annum, or ~ $101k. Conversely, a 50-bps increase in the 30-year German Government bond yield could result in a potential loss of 10.6% per annum, equivalent to $106K.

Note: The calculations and analyses provided do not consider fluctuations in exchange rates, which can impact trades either positively or negatively. Past performance is not indicative of future results.

ECB: The Path Ahead

The European Central Bank (ECB) maintained its interest rates steady at 4% on January 25, 2024. This is the third consecutive meeting in which the ECB has kept deposit rates at current levels, following 10 rate increases in a row from July 2022 until September 2023 amounting to 4.5 percentage points.

As a result, the eurozone economy has stalled considerably, with the threat of recession looming over it. The Germany composite PMI index, which comprises services and manufacturing, remained in contraction territory for a seventh straight month, falling to 47.0 from 47.4 in the previous month.

Price pressures in the eurozone are abating at a fast pace, with the inflation rate drastically declining to 2.9% in December 2023. Euro area inflation had been above 10% in October 2022 and at 8.6% at the start of 2023. While inflation has dropped in recent months, it is expected to rise modestly primarily due to the base effect in energy prices and the termination of social support measures. Nonetheless, the downward trajectory will continue as ECB staff expect headline inflation to average 5.4% in 2023, 2.7% in 2024, 2.1% in 2025 and 1.9% in 2026.

Euro Buxl Price Trend Analysis

ECB Deposit Rate is at the highest level since the Euro was established in 1999.

Source: Bloomberg
Date: 7th Feb 2024

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As illustrated in the chart provided, during the 2008-09 period when the ECB deposit rate decreased, Buxl prices experienced an ascent from 2009 to 2010. Similarly, throughout the 2011-2021 timeframe, as ECB rates declined, Buxl demonstrated a consistent upward trajectory, reaching levels above €225.
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As anticipated, the period of ECB interest rate increases in 2022-23 corresponded to a gradual decline in Buxl prices, falling below €120.
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With ECB deposit rates currently at their highest level since the establishment of the Euro in 1999, it is expected that Buxl prices will once again see an upward trend as the ECB considers implementing rate cuts.
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As indicated in the accompanying chart, the range of €122-125 is identified as a strong support region for Buxl. The immediate resistance is observed around the €140-150 zone, presenting a favorable trading opportunity with a 10-15% range. Next major resistance is seen near €160-170 zone followed by the psychological mark of €200

Historical Analysis of Euro Buxl Post-Global Financial Crisis Rate Cuts

Before the 2008 Global Financial Crisis, inflation in the eurozone had accelerated to 3.6%, far above the ECB’s 2% target. As a result, the ECB embarked on a mission to tighten financial conditions. This raised the yield on the 30-year German Government bond to 4.853% as on June 30, 2008. At the time, the Euro Buxl was trading for €86.66. The meltdown that ensued following the Global Financial Crisis compelled the central bank to slash rates in a bid to stimulate economic growth. Thus, the 30-year German Government bond yield declined to 3.535% on December 31, 2008, sparking an 18.53% jump in the price of Euro Buxl to €102.72. The table below highlights the changes in the 30-Year German Government bond yield on Euro Buxl’s price.

Date Historical Yield on the 30-Year German Government Bond Historical Price of Euro Buxl % Change inEuro Buxl’s Price
30/06/2008 4.853% € 86.66 Base Case
31/12/2008 3.535% € 102. 72 18.53%

Source: Bloomberg
Date: 7th Feb 2024

Markets project rate cut by June 2024

Markets are now expecting the ECB to begin slashing rates from June 2024 (vs March earlier). Among major brokerages, Barclays and UBS Global Research expect the start of cuts in April. JP Morgan expects a first-rate cut by September 2024, however, it expects back-to-back rate cuts totalling 100 bps.

The chart below shows that markets broadly expect the Eurozone benchmark deposit rate likely peaked at 4%, especially after the central bank left rates unchanged for the third consecutive meeting on 25 January 2024.

Eurozone Interest Rate Probability

Source: Bloomberg
Date: 7th Feb 2024

30-year German government bond yield

Source: Bloomberg
Date: 7th Feb 2024

Historical Analysis of Euro Buxl Post-Global Financial Crisis Rate Cuts

As can be seen in the chart above, the yields have rallied significantly over the past 5 years and appear due for a pullback. At present, the yield on the 30-year German Government bond sits at 2.51%, marking an increase from its December 2023 low of 2.10%. This presents a favorable opportunity to leverage the surge in interest rates, particularly with the decline in Buxl prices. Additionally, it's worth noting that yields face significant resistance around the 2.60%-2.70% range, with further resistance anticipated at 2.85%

Data Source: Bloomberg
Data & Prices as of 7th February 2024

Arun Leslie John
Chief Market Analyst

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