Citi Says World Cup May Soothe Bond Markets, Recommends Trade on Lower Volatility

Citigroup expects volatility in U.S. and European bond markets to ease sharply this summer.

Bloomberg reported on June 13 that the bank published a note recommending investors position for lower yield-curve volatility ahead of the World Cup. Citi argued that the global soccer tournament would draw investors' attention away from markets and help keep trading calm.

Mike Chang, a Citigroup analyst, wrote that short-term rate volatility in the U.S. and Europe has historically stayed low or fallen further during World Cup periods. That backs the bank's bearish near-term view on volatility. He added that the market may be overstating the range of moves over the next month in yields on two- to 10-year debt, and recommended a short-term options trade that sells yield-curve volatility.

Bond-market volatility typically eases as trading activity slows during the Northern Hemisphere's summer vacation season. With the World Cup running through July 19, market liquidity could thin further. Citi said bond traders may spend less time monitoring markets and more time watching soccer, reducing trading participation.

The ICE BofA MOVE Index, a gauge of bond-market volatility, has declined steadily since peaking in March and is now below its level a year earlier.

Citigroup also expects short-term rate volatility to remain limited despite geopolitical uncertainty surrounding conflict in the Middle East. The bank said the Federal Reserve's gradual approach to monetary policy could help restrain sharp market swings.