USD Vol: Phantom positions come out with extreme moves

Spectre
;
Vols ticked up higher still with pieces like 1y1y near highs. With the extreme moves, small positions are magnified, sources say. Citi examines skew.

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.


Or contact our Sales Team to discuss subscription options.

Get in Touch

 

 

  • Phantom positions come out with extreme moves

  • Citigroup – Short expiry skews too flat; Receivers rich

  • New structured notes

     

    Phantom positions come out with extreme moves  

    Treasuries have sunk lower still. Delivereds are down from the skyrocketing double digits seen in the past couple of days to a more pedestrian 10.5bps in the back end - but that does not mean the market is stabilizing.  To be sure, swap spreads gapped lower on zero liquidity with spreads in another 2-6bps, leaving traders to proclaim that the markets are broken. Meanwhile, the 5y auction tailed 2bps vs. the 1pm bid side and sources say that the auction was “bad.”  

     

    The vol surface ticked up higher with 3m, 6m and 1y expiries anywhere from 1 to 3 normals higher, led by the left side. Liquidity has been sparse with everyone on the defensive amid the wild moves.  With much of the vol surface near/at highs, the breakevens across the surface are at roughly 11.3bp/day breakeven at the highest point on the surface (1m3y), while1y1y is now around 10.5bps/day and 3m10y not far behind at 9.5bps/day.

     

    One source pointed out that with the magnitude of the recent moves, “small positions are magnified everywhere” and “you figure out if you were long or short something you never paid much attention to - based on how much things are moving these days.”

     

    In interbank activity today, 1y10y traded at 892bps on a total of $450m, and then traded up at 899bps last on $150m in total. 1y1y dealt at 131bps (very close to the June high on an annualized basis ), 3m10y traded at 495bps and then 500bps, and 3y10y traded at 1330bps and is last mid around 1338bps. At the start of the session, 6m1y versus 6m10y traded as a switch at 86bps and 655bps, respectively, according to the SDR. For more, please see SDR trades.

     

     

    Citigroup – Short expiry skews too flat; Receivers rich

    Analysts at Citigroup find that while vols have rebounded higher in positive directionality, short expiry payer skews “have not increased meaningfully.” The bank believes this lack of response by skew “can be interpreted as the market’s belief that the Fed can only tighten so much more before hitting a limit and be forced to pause.”

     

    That said, Citigroup points out that the relative flatness of short-dated payer skew on the 10y rate is “especially noticeable” when compared against the intermediate expiry payer skew “that has been trending higher,” with for example, it notes that  2y10y, “has steadily increased to its multi-year high while short expiry skew, such as the 3m10y, has retraced lower since the summer and remained essentially unchanged.”

     

    Over time, Citigroup expects the two “to re-converge, likely with the short expiry skew increasing rather than the intermediate expiry skew declining.” The bank believes the flatness of the short expiry skew “is more a reflection of the relative richness of the receiver skew rather than the cheapness of the payer skew.”

     

    For investors who believe that the Fed will tighten the economy into a recession, Citigroup recommends using receiver ladders to position for a “higher first but ultimately lower” yield path. “The current combination of elevated ATM vol, relatively rich short expiry receiver skew, and historically negative forward-spot rate roll provides an ideal opportunity to own receiver ladders,” Citigroup says, and “because of the extreme yield curve inversion, the rate rolls from forwards to spot are currently at their all-time historical lows, which would provide an additional cushion to the receiver ladder’s terminal breakeven,” it adds.

     

    Looking at a range of receiver ladders according to potential profitability and loss, Citigroup suggests that a 6m5y receiver ladder “might be a good compromise where there is a decent probability of realizing a profit (41%) and still relatively low probability of realizing a loss (1.4%).”

     

     

    New structured notes

    For a complete review of USD MTN activity over the past week, please see USD MTNs.

     

    • Standard Chartered is working on a self-led $60mm fixed callable maturing Sep 2027 NC2 that pays 5.98%. EMTN.

       

    • Barclays is working on a self-led $10m fixed callable maturing Dec 2027 NC1m that pays 7.92%. Credit linked to Oman. EMTN.

       

    • Barclays is working on a self-led $20m fixed callable maturing Sep 2027 NC1 that pays 5.95%. EMTN.

       

    • Citigroup is working on a self-led fixed callable maturing Oct 2025 NC1 that pays 5.55%. EMTN.

       

    • Dow Chemical is working on a fixed callable via Incap maturing Oct 2032 NC6m that pays 5.5%. Domestic MTN. 

       

    • Dow Chemical is working on a fixed callable via Incap maturing Oct 2027 NC6m that pays 5.4%. Domestic MTN. 

       

    • Dow Chemical is working on a fixed callable via Incap maturing Oct 2052 NC6m that pays 5.4%. Domestic MTN. 

       

    • Ally Financial is working on a fixed callable via Incap maturing Oct 2027 NC6m that pays 5.666%. Domestic MTN. 

       

    • Ally Financial is working on a fixed callable via Incap maturing Oct 2025 NC6m that pays 5%. Domestic MTN.