Dealers debate regime change in US interest rate volatility

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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