Gilts Just Want to Have Fun

Global capital markets have witnessed increased volatility across 2022. However, few markets have recently been as shaken as the UK Gilt market. There is no better example of this swing in market temperament than 12th October 2022, in which traders sold holdings after the Bank of England (BoE) confirmed it wouldn't extend a deadline for its bond-buying program.

Hours later, the market reversed. The (BoE) made its largest round of emergency purchases since the intervention began in September 2022. In response, we analysed the impact on Long Gilt Future Dec22 on ICE Futures Europe (RLIZ22).

We examined RLIZ22 across 12th October 2022 (Exhibit 1a). The most significant spike in volatility occurred for fourteen seconds between 07:28:34 - 07:28:48 UTC, observed as a steep fall in the midpoint price (Exhibit 1b). This move represents a ~2% change in price in 14 seconds. Equating to a ~1000% move in annualised volatility. Prices quickly reverted within ~90 seconds. Spreads widen significantly across the same period and remain elevated after the price reversion (Exhibit 2). The move downwards is led by cancellations of passive orders, with fills making up 22% of the activity in the minute of the fall.

Exhibit 1a

Exhibit 1b

Exhibit 2

Finally, we considered the number of events in RLIZ22 to demonstrate the regime change. Again, we focused on the fourteen seconds between 07:28:34 - 07:28:48 UTC. We looked at a typical trading period, September 2022, and we observed an average of ~2,400 events per minute, with a standard deviation of the same magnitude. However, when examining 12th October 2022, it’s apparent how volatile the markets were. Within quick succession, we saw a far greater number of events than we did on a typical trading day, with a peak of 25,000 representing a ten standard deviation move (Exhibit 3). Although, over the whole day, the 12th October has a 0.8% decreased event count compared to September 2022 averages. Suggesting that we saw a volatility event with the market state quickly returning to normal.

Exhibit 3

Conclusion

As we enter a period of higher interest rates, global bond markets are likely to experience increased levels of volatility. Therefore, understanding outlying events in the derivatives markets is essential for participants who need to make critical trading decisions. While 'fun' times for the UK Gilt Market might not yet be on the horizon, at least a period of stability could be in sight.

All data used for calculations and plotting was sourced from BMLL and the BMLL Data Lab. If you would like to know more about BMLL products or futures data, please contact info@bmlltech.com.