USD Vol: Left side stays bid; Right side dips

Curvy road 6 DEc 2021
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USTs plunged more than 30bps after weak ISM, and the UK reversal on tax cuts. The very ULC held a bid while the rest of the surface dipped lower.

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  • Left side stays bid; Right side dips 

  • CMS curve vol to outperform swaption vol – Citigroup

  • New structured notes

     

    Left side stays bid; Right side dips 

    Rates plunged – first with the UK PM walking back the widely bashed tax cuts and then a second leg was propelled by weak domestic ISM data. At the apex, UST yields were down over 30bps in the belly, with the 5y note yield hitting 3.7835% and the 10y touching 3.5655%. Yields are last anywhere from 7.5 to 20bps lower, led by the belly.

     

    The vol surface saw a degree of softening in gamma for longer tails, while the very upper left continued to hold a better bid. For example, 3m expiries are marked anywhere from 3 normals lower on the right to 2.5 normals higher on the left, with 6m and 1y expiries seeing similar moves to a lesser degree. Further out vega is marking 0.2 to 0.5 normal lower.

     

    Liquidity remains a significant issue with the rate swings amplified due a lack of support, sources say. That said, one source considered that should the market start to see a return to less volatile price action in the coming days, then vols could start to trend lower as “the market has a short memory” of big moves, he judged.

     

    Meanwhile, the ULC “is way past GFC levels,” one source highlighted, who added that “it seems like someone is always there to take it back up” as it “seems always well bid.”

     

    And with more non-US centric events causing the overnight USTs markets to swing, a source remarked that it is essential to monitor and hedging positions 24 hours, with orders left overnight.

     

    In interbank activity today, starting with in the ULC, 1y2y traded at 255bps, likely against 2y1y at 179bps, 3y1y traded at 201bps on a total of $350m, 1y1y dealt at 130bps on good size (possibly versus 1y10y at 845bps).  On the right side, 6m10y traded at 624.5bps, 2wk30y traded at 374bps on a total of $200m, and 3m30y traded at 867.5bps. In switch, 3m5y traded at 281bps versus 3m10y at 461bps, according to the SDR.

     

    In longer expiries, 15y10y dealt at 1842bps on a total of $125m and 10y20y traded at 2655bps on $25m. 7y20y dealt at 2495bps on a total of $150m, according to the SDR. For more, please see SDR trades.

     

     

    CMS curve vol to outperform swaption vol – Citigroup

    Analysts at Citigroup call last week a “historic” week, “in terms of both DM rate moves and central bank intervention, investors are reminded of the fragility of financial markets that no longer benefit from the tailwind of accommodative monetary policies.”

     

    “Even though the collateral margin squeeze experienced by UK LDI investors seemed distant from the US rates market, the unprecedented surge in GBP rates volatility (GBP 1y10y implied vol reached a level of nearly twice of the financial crisis peak) undoubtedly injected term premium back into the global rates markets,” Citigroup highlights.

     

    “With global central banks forced into delicate balancing acts of addressing their (explicit and implicit) mandates on growth, price stability, and financial market stability, we should expect higher likelihood of more focused policies that are designed to impact specific asset class and/or part of the yield curve” and Citigroup believes that such a dynamic “can accentuate the already elevated volatility in the yield curves.”

     

    With this backdrop, “even though the implied CMS curve vols are elevated on an outright level, surprisingly they appear to be undervalued on a relative basis to swaption vols despite the recent market moves,” the bank points out. Thus. it believes “structurally there is more room for USD implied CMS curve vol to outperform swaption vol.”

     

     

    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 fixed callable maturing Oct 2023 NC6m that pays 4.04%. EMTN.

       

    • Citigroup is working on a self-led fixed callable maturing Oct 2025 NC1 that pays 5%. EMTN.

       

    • Citigroup is working on a self-led fixed callable maturing Jul 2024 NC6m that pays 5.25%. Domestic MTN.

       

    • Citigroup is working on a self-led $10m fixed callable maturing Oct 2025 NC1 that pays 5.3%. EMTN.

       

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

       

    • Citigroup is working on a self-led fixed callable maturing Oct 2024 NC1 that pays 5.45%. Domestic MTN.

       

    • Credit Suisse is working on a self-led fixed callable maturing Oct 2024 NC6m that pays 5.75%. Domestic MTN.

       

    • Credit Suisse is working on a self-led fixed callable maturing Oct 2023 NC3m that pays 4.7%. Domestic MTN.

       

    • Credit Suisse is working on a self-led fixed callable maturing Oct 2027 NC1 that pays 5.77%. Eurodollar.  

       

    • Credit Suisse is working on a self-led fixed callable maturing Oct 2023 callable and putable Dec 2022 that pays 4.25%. Eurodollar.  

       

    • CIBC is working on a self-led fixed callable maturing Oct 2027 NC1 that pays 5.5%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Oct 2032 NC1 that pays 5.75%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Oct 2025 NC1 that pays 5.25%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Oct 2024 NC1 that pays 4.9%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Apr 2024 NC1 that pays 4.6%. GMTN.

       

    • UBS is working on a self-led floating callable maturing Oct 2024 NC1 that pays 1y ICE SOFR flat. EMTN.

       

    • UBS is working on a self-led fixed callable maturing Oct 2024 NC1 that pays 3.85%. EMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Oct 2027 NC1 that pays 6%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Oct 2025 NC6m that pays 5.5%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Apr 2026 NC1 that pays 5.65%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Nov 2023 callable Jul 2023 that pays 4.7%. GMTN.

       

    • Toronto Dominion is working on a self-led step-up callable maturing Oct 2028 NC1 that pays 6% to Oct 2025 and 6.25% thereafter. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Apr 2023 NC3m that pays 3.6%. EMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Jan 2024 NC1 that pays 4.9%. EMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2023 NC6m that pays 4.4%. EMTN.

       

    • Bank of Montreal is working on a self-led $20m floating putable maturing Oct 2027 putable Apr 2023. EMTN.

       

    • Societe Generale is working on a self-led fixed callable maturing Oct 2027 NC6m that pays 6.1%. Domestic MTN.  

       

    • Societe Generale is working on a self-led fixed callable maturing Jan 2026 callable Jan 2024 that pays 5%. EMTN. Credit linked to the People’s Republic of China.