Dealers debate regime change in US interest rate volatility

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The record high dollar interest rate implied volatility (see figure 1) in late 2001 prompted many traders to sell options, reasoning that levels would drop again, in line with longer-term averages. When they didn’t, some lost their jobs. “People got creamed,” says David Zervos, derivatives and mortgage strategist at Greenwich Capital Markets in Connecticut.

Calling longer-term trends is a less risky business. That is precisely what Deutsche Bank’s fixed-income global markets research group is

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