Violent rally; High realizeds, illiquidity persists
Treasuries have flown back higher with the UK emergency QE causing Gilt yields to crash 40 to 114bps. UST yields are down anywhere from 14 to 23bps, with the belly seeing the largest gains, while swap spreads have rebounded 4-6bps wider after yesterday’s meltdown of around the same magnitude. Helping the bid, the $36bn 7y auction was the first of the week to go well, coming 1.3bps through the 1pm bid side.
Amid this turbulent backdrop, the vol surface is higher, in a non-directional move with the high realized volatility and uncertainty appearing to trump other considerations. The ULC is last marked anywhere from 2-11 normals higher, with 3m1y leading the jump. However, to note, next to nothing has traded on the SDR in the ULC with exception of one trade in 1y1y at 133bps on $250m.
The sheer scope of the recent moves has pointed to the vast swaths of illiquidity and lack of functioning markets in USTs, swap spreads, as well as in options, sources point out.
Meanwhile, implieds are slightly higher in 5y to 30y tails in 3m expiries on out to longer expiries, with sedate gains around 0.5 to 1 normal.
In interbank trading activity, 1y5y traded at 560bps and 561bps and then last at 558bps, 1m5y dealt at 182.5bps, and 1m10y traded early at 307bps. 1y10y traded at 910bps on $200m and 2y10y dealt at 1190bps on a total of $200m, according to the SDR.
In longer expiries, 3y30y dealt at 2595bps and 2600bps, 20y7y traded at 1520bps on a total of $75m, 5y10y traded at 1534bps. 5y5y traded at 917bps, possibly versus 2y10y at 1182bps and 2y5y at 724bps. 10y10y traded early on at 1745bps on small size of $25m, according to the SDR. For more, please see SDR trades.
In skew, the need to buy upside protection was seen via 1y10y 100bps each way risk reversals trading at +44bps and +43bps this morning, according to the SDR. The same risk reversal traded last Tuesday at +38bps, sources note.
ULC buys and front end payer structures – Barclays
Analysts at Barclays examine SDR swaption activity over the past two weeks. The bank finds that swaption market flows “have had a long vol bias over the past two weeks” with long vol positions “concentrated in the left hand side… targeting a more resolute inflation-fighting Fed.”
At the same time, Barclays notes that short vol activities such as systematically selling 1m10y and 1m30y straddles have “diminished over the past two weeks and interests in selling vol remain low after the FOMC meeting.”
Secondly, Barclays sees that market participants have been “expressing bearish views through swaptions at the front end of the curve, with, for example, “an increase in directional structures reported on SDR over the past couple of weeks” such as payer-based structures 3m1y ATM+15/ATM+65 payer spread and 1y1y ATM+125/ATM+150/ATM+175 ladders, that target “a sizable further sell off in policy-sensitive areas as the Fed maintains its hawkish narrative,” it finds.
In longer tenors, however, Barclays points out activity in receiver-based structures such as a 1y10y ATM/ATM-50 receiver spread and 5y5y ATM-100/ ATM/ ATM+100 receiver-based seagull.
Lastly, the bank highlights that the short expiry term structure is “leading to increased activity in vol spreads” such as 1m30y vs 2m30y receiver-based calendar spreads, and 2m10y vs 3m10y ATM calendar spreads.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Barclays is working on a self-led floating maturing Dec 2024 callable Oct 2022 that pays O/N SOFR +157bps. Credit linked to BMW Finance. EMTN.
- Citigroup is working on a self-led fixed callable maturing Oct 2025 NC1 that pays 5%. EMTN.
- HSBC is working on a self-led $27m step-up callable maturing Oct 2023 NC6m that pays 3.2% to Apr 2023 and 3.3% thereafter. Eurodollar.
- HSBC is working on a self-led $27m step-up callable maturing Oct 2023 NC6m that pays 4.5% to Apr 2023 and 4.6% thereafter. Eurodollar.
- Credit Suisse is working on a self-led fixed callable maturing Jan 2024 callable Jan 2023 that pays 5%. Domestic MTN.
- Credit Suisse is working on a self-led fixed callable maturing Oct 2027 NC1 that pays 6%. Domestic MTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Oct 2023 NC6m that pays 4.1%. EMTN.
- Standard Chartered is working on a self-led $50m fixed callable maturing Oct 2024 NC1 that pays 5.05%. EMTN.