2024-05-13 17:25:52 ET
Summary
- The inverted Bund yields continued this week with the negative 2-year/10-year yield spread at negative 44.9 basis points compared to 42.3 basis points last week.
- As a result, today’s simulation shows that the probability of negative spreads in the 91-day period ending November 8, 2024, has moved to 67.8% from 66.1% in the prior week.
- That means the probability that the inverted Bund yield curve ends by November 8, 2024, is 32.2% versus 33.9% last week.
- The most likely one percent ranges for the 3-month yield (zero to 1%) and 10-year yield (1% to 2%) in 10 years are unchanged this week.
- The simulation with U.S. Treasuries shows a Euro/U.S. Dollar exchange rate at a median value of 1.0615 and a standard deviation of 0.0949 one year forward.
- The same simulation is used to price short and long-dated foreign exchange options on the Euro versus the U.S. dollar at a strike price of 1.07.
Author’s Note
This simulation has been done jointly with a U.S. Treasury yield simulation in a way that reflects the correlation among the 12 factors driving yields in each country. For more on the companion U.S. Treasury simulation, please contact the author. Both the Bund and the U.S. Treasury yield simulations impact foreign exchange rates, resulting in the following distribution of the Euro/U.S. dollar exchange rate one year forward:
Pricing for short- and long-dated options to buy Euros versus U.S. dollars at a strike price of 1.07 for quarterly maturities out to 30 years is given below:
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For further details see:
Weekly Bund Yield Forecast, May 10, '24, FX Options Prices For Maturities To 30 Years