(Bloomberg) — Traders may have another reason to worry less about bond volatility spiking this summer: the FIFA World Cup.
Citigroup Inc. says market swings in US and European debt markets tend to ebb when the most-watched sporting tournament on the planet takes place. With the first matches starting Thursday, the bank has reiterated its recommendation to position for lower volatility in the yield curve.
“Historically, short-dated rates vols in US and EUR tend to stay low or grind even lower during the World Cup, which supports our near-term bearish vol bias,” strategists including Mike Chang wrote in a note dated June 8.
Citi strategists say moves in the two- to 10-year part of the yield curve tend to be more modest than those implied over the next month by current market pricing.
To take advantage of the trend, the bank is recommending a short yield-curve volatility trade using options.
“We continue to favor being tactically short curve vol in the near-term, especially heading into this summer’s football tournament,” they wrote.
Market volatility typically eases during the Northern Hemisphere summer as investors head on vacation and trading activity slows. The World Cup — which runs from June 11 through July 19 — could further drain liquidity, with some traders potentially devoting more attention to matches than markets.
The ICE BofA MOVE Index, a measure of bond-market volatility, has fallen from a high in March and remains below levels seen a year ago, signaling rates have settled into a relatively narrow range.
Despite uncertainty around the Middle East conflict, Citi expects short-term interest-rate volatility to remain subdued, saying that the Federal Reserve’s gradual approach to policy should help keep market swings contained.
While this week’s US consumer-price report may trigger market swings, the bank said markets could see a month-long period of relative lull afterward.
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