EMISSIONS: EUAs Implied Volatility Hits Lowest Since Mid-March

The SONIA/Euribor December ’25 futures spread underscores the current focus on tariffs and the global trade picture.

• The spread has closed in a sub-25bp range since mid-January, after compressing from the late ’25 high.
• While there have been instances of local issues driving two-way movement within the range seen since mid-January, the lack of meaningful movement in the spread points to external macro drivers dominating.
• Going forwards, the potential for a more activist approach from both the ECB & BoE presents some risks to the recent range.
• ECBspeak has generally shifted in a dovish direction over the last week or so (~63bp of further cuts priced through year-end).
• Meanwhile, we have previously suggested that if the BoE MPC wants to open the door to a change in its guidance than it could remove the word “gradual” but temper the change by keeping “restrictive” and “careful”. This would signal to the market that there was a possibility that the Bank may accelerate rate cuts as far as neutral, which would at least open up the potential for back-to-back cuts between May and August (59bp of cuts priced over that horizon at present).

Fig. 1: SONIA/Euribor December ’25 Futures Spread (SFIZ5/ERZ5)

Source: MNI - Market News/Bloomberg

Option desks reported better SOFR put volumes on net overnight, aside from large Jun'25 Call condor, Treasury options muted but focused on Jun'25 10Y calls. Underlying futures lower, paring back a portion of Monday's gains (TYM5 currently 111-23, -6) ahead of today's data that includes JOLTS Job Openings (1000ET); Pres Trump to tout first 100 day performance from MI. Projected rate cut pricing softer vs. late Monday levels (*) as follows: May'25 at -2.3bp (-2.7bp), Jun'25 at -16.9bp (-17bp), Jul'25 at -37.6bp (-38.1bp), Sep'25 -57.4bp (-58.7bp).

• SOFR Options:
  • 21,000 SFRM5 95.87/96.00/96.25/96.37 call condors
  • 15,400 SFRM5 95.75/95.81 put spds ref 95.895
  • 11,400 SFRM5 95.68 puts, 0.5 last
  • over 5,900 SFRZ5 95.62 puts, 3.5 last
  • 12,580 SFRZ 95.56/95.68/95.81 put flys ref 96.575
  • 2,500 0QZ5 97.00/97.50 call spds ref 96.935
  • 1,850 SFRK5 95.81/96.18 1x2 call spds ref 95.885
• Treasury Options:
  • 6,300 TYM5 113/116 call spds ref 111-27.5
  • over 4,300 TYM5 114 calls

Finance Minister Kyriakos Pierrakakis, speaking to ERT, has said that the gov't will request the European Commission exempts Greece's 2026 defence spending from the Union's Stability and Growth Pact assessments that determine whether a country is placed under the excessive deficit procedure conditions. 

• Pierrakakis says the request comes as part of the 'fiscal escape clause' that sees increase gov't spending exempted from the EDP calculations if the new money goes towards defence spending as part of its 'ReArm Europe' strategy.
• Pierrakakis: "The increase [in spending] planned from 2025 to 2026 is approximately half a billion euros [0.3% of GDP] that has been planned and this also concerns the following years. There is a very specific defence spending program that we have presented as a government,”
• Under the proposed escape clause rules, a member state would be allowed to increase defence spending by up to 1.5% a year for four years without this counting towards the 3% of GDP budget deficit limit set out in the SGP.
• For a number of EU countries the concern over how or if to increase defence spending has not come down to the permissions granted by the 'escape clause', but by the possible adverse reaction from financial markets should the increased spending not be viewed as sustainable.
• Reports suggest Germany has sent its own letter to Brussels requesting an exemption.