Euro-Buxl Futures: Filling the gap at the long end of the yield curve
Eurex's decision to relaunch futures on long-dated German government debt has met with strong response from a wide range of market participants.
Open interest for the new Euro-Buxl Futures mounted to 28,000 contracts at the end of February 2006. Many market professionals are confident that demand will pick up from this healthy start - for a variety of reasons.
There is significant market demand for long-term Euro Fixed Income derivatives, as governments in Europe - and indeed around the world - increasingly turn to issuing long-dated bonds. European Benchmark for 30-year Euro Sovereigns Like the other Eurex Euro Fixed Income contracts, the Euro-Buxl Future's delivery basket is made up only of German government bonds. Nevertheless, market participants increasingly recognize the Euro-Buxl Future as the primary tool to hedge and exploit trading opportunities in all long-dated Eurozone government debt.
With Eurozone countries expected to issue at least EUR 73.5 billion of long-term EUR-denominated government bonds throughout 2006, the Euro-Buxl will emerge as a European benchmark, in much the same way as Eurex's Euro-Schatz, Euro-Bobl and Euro-Bund Futures contracts were established in their respective maturity ranges.
Optimized Contract Design
The increased Eurozone sovereign issuance of long-end debt is, of course, not the only reason why the outlook for Euro-Buxl ® Futures is very promising. Eurex has significantly redesigned the contract.
It has modified the delivery basket, which is now made up of German government bonds with a maturity of 24 to 35 years. This brings the contract's duration closer to that of 30-year cash Bunds.
As a further measure, only bonds with a minimum issue size of EUR 10 billion euro are eligible for delivery into the contract. This ensures that there are enough liquid bonds in the delivery basket.
Eurex has also reduced the notional coupon from six percent to four percent, closer to the current yield levels in the cash market. This reduces valuation differences within the bonds in the basket and therefore creates attractive trading opportunities, such as basis trading.
The Perfect Tool for Professional Portfolio Management
Another extremely relevant factor is the real demand for the contract that is clearly emerging from pension funds and insurance companies. This will grow, as such entities have an increased obligation to closely match the maturity of their assets to their longer-dated liabilities.
As a result, many fund managers have increased the weighting of longer-dated bonds in their portfolios by shifting out of equities. Euro-Buxl Futures can be used by fund managers in numerous ways, from hedging existing port-folios, managing cash flow in and out of funds and adjusting portfolio duration. The new contracts can also be used for portfolio overlay strategies, such as creating a synthetic switch from equities to bonds.
The new contracts also make it easier and cheaper to take out relative value positions further out along the yield curve. By combining Euro-Buxl Futures with Eurex's other fixed-income contracts, views can be expressed, for example, on whether the 2- to 30-year curve is likely to steepen or flatten. Similarly, barbell positions can be initiated, such as a view that the long and the short end will outperform the 10-year segment of the curve.
Relative value trades using the Euro-Buxl Futures are further facilitated by margin offsets against positions in the Euro-Schatz, Euro-Bobl or Euro-Bund. Tight Spreads and Good Liquidity Helping to Build a Diverse Client Base Considerable customer interest, backed by the market making scheme Eurex put in place, have
helped the Euro-Buxl get off to an extremely good start and attracted a good range of participants.
Almost 50 per cent of the business transacted so far has come from end customers, with 36 percent stemming from proprietary accounts. Market Maker activity has made up the rest of the volume. This healthy split of activity bodes well for the contract's future.
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