###The ECB threat to the 5Y. - What does a.....>

BOBL: ###The ECB threat to the 5Y.

- What does a reactive ECB mean for the rates space? 

- Already, there have noted a number of downside Bobl option trades since

yesterday and the 5Y is underperforming badly today. 

- A 'reactive' ECB means that gamma heavy options like 1m, 3m and 6m maturities

are unlikely to see implieds pushed much higher. But the catch-up from the ECB

when it turns out that they are behind the curve should push that volatility out

into longer maturities although 5Y5Y or 5Y10Y normalised vols have yet to show

any strength, just less weakness.

- For the curve, the 2-5-10Y fly tends to rise when the central bank is hiking

to late. Historically, the German 2-5-10Y fly has ranged from -60bp to +50bp

(briefly in 1994) and is -3bp today. If we assume that there is a lower peak

interest rate, then the high end of that historical range is a pipe-dream but a

+30bp 2-5-10Y fly is extremely plausible.

- With current growth levels, upside surprises to EZ core inflation hurts 5Y

more than other tenors and brings a 30bp-area 2-5-10Y fly into focus.