USD Vol: ULC leads gains; 15y10y active

The matrix
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Vols are higher today, led by the ULC. Sources say the thin markets have likely contributed to the counter-directional trading.

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  • ULC leads gains; 15y10y active  

  • 3y30y vol looks very cheap versus 1y30y and 5y30y – Citigroup

  • New structured notes

     

     ULC leads gains; 15y10y active    

    Treasuries have continued to flatten to new lows, with the 10y note yield last 3.758% or 8.2bps lower and 2s10s ratcheting another 2.6bps lower at -75.8bps. Earlier, the 7y auction was uniformly weak (tailing 2.5bps and with the highest dealer allocation since July 2021), but the result did not put a lasting dent on the bid to USTs.

     

    Despite the rally mode in USTs, the vol surface is seeing a touch better bid, led by the ULC. For example, 1y1y trading up at 114.25bps, 115bps and then up at 116bps.

     

    In shorter expiries, 3m expiries are anywhere from 0.25 normal lower to 4 normals higher on the day, with diminishing gains going further right. For example, 3m5y is marked around a normal higher while 3m30y is lower on the day by roughly 0.25 normal.

     

    “The markets are thin everywhere,” remarked one trader, by way of explanation to the counter-directional vol move versus the underlying rate move today. “Tomorrow could be even more counterintuitive,” he suggested.

     

    In interbank activity 15y10y has seen a fair amount of trading today with 1705bps, then 1708bps, then up to 1713bps, only to trade back down to 1705bps last. Meanwhile 10y10y traded at 1620bps, 5y10y dealt at 1442.5bps and then up at 1444bps.

     

    Elsewhere, 1y10y traded at 820bps – possibly versus 2y10y at 1092bps – and 1y10y also dealt at 816bps – possibly versus 2y10y at 1088bps. 5y10y traded at 1435bps, 1y5y traded ay 494bps and then a 495bps (likely versus 2y5y at 664bps), 1y20y traded at 1265bps (possibly versus 15y10y at 1705bps) and also dealt at 1259bps in a fly trade versus 3y20y at 1914bps and 5y20y at 2170bps, according to the SDR. For more, please see SDR trades

     

    In shorter expiries, 3m10y traded at 432bps, and in the ULC, 1y2y traded at 222bps and 223bps. As for skew, some 1y10y 100bp each way risk reversals traded again at 36.5bps, according to the SDR.  

     

     

    3y30y vol looks very cheap versus 1y30y and 5y30y – Citigroup

    Analysts at Citigroup argue that the cheapening in intermediate expiries may have reached “an extreme, especially on the long tails.” For example, Citigroup believes that “3y30y vol looks extremely cheap relative to the 1y30y and 5y30y vols, with the 1y30y/3y30y/5y30y vol fly at its decade low aside from the 2020 Covid shock.”

     

    Moreover, Citigroup points out that a simple regression of the 1y30y/3y30y/5y30y vol fly on outright 3y30y vol to account for the level of vol “suggests that the fly vol is also at its decade low and is about 6 normals too low” while another assessment of focusing on just the slope of the vol term structure, a simple regression of the 3y30y-1y30y vol spread on the level of 1y30y vol” suggests that the vol spread is about 3 normals too low.”

     

    However, with the bank’s current modest bearish bias on implied vol as a whole over the medium term, Citigroup is “hesitant to be outright long forward vol.” Instead, the bank prefers to position via a relative value switch of long 3y30y against 1y30y “where the historical inverse directionality to outright vol also provides an implicit short vol exposure” as “the long 3y30y versus 1y30y vol switch can be a way to express a bearish vol bias with the added relative value kicker potentially working in your favor.” Alternatively, Citigroup suggests “investors can structure the vol switch using a beta-adjusted weighting to mitigate the directionality to outright vol.”

     

     

    New structured notes

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

     

    • Societe Generale sold a $28.5m 10y NC4 floating callable Formosa. The EMTN matures Dec 2032 and is callable annually starting Dec 2026 and pays a coupon of 5y ICE SOFR +175bps. Leads Cathay, E Sun and SG Securities HK. Announced Nov 16.

       

    • Nomura is working on a self-led CMS ranger maturing Jun 2027 NC9m that pays CMS1y +85bps*days CMS1y is 0-6.25%. EMTN.

       

    • Nomura is working on a self-led CMS ranger maturing Jun 2027 NC9m that pays CMS1y +80bps*days CMS1y is 0-6.25%. EMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Aug 2023 NC6m that pays 5.1%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Nov 2023 NC6m that pays 6%. GMTN.

       

    • Ford Motor Credit is working on a fixed callable via Insperx maturing Dec 2032 NC1 that pays 7.15%. Domestic MTN.

       

    • Ford Motor Credit is working on a fixed callable via Insperx maturing Dec 2026 NC1 that pays 6.75%. Domestic MTN.

       

    • Dow Chemical is working on a fixed callable via Insperx maturing Dec 2052 NC6m that pays 6.2%. Domestic MTN.

       

    • Dow Chemical is working on a fixed callable via Insperx maturing Dec 2032 NC6m that pays 5.75%. Domestic MTN.

       

    • Dow Chemical is working on a fixed callable via Insperx maturing Dec 2032 NC6m that pays 5.75%. Domestic MTN.

       

    • Ally Financial is working on a fixed callable via Insperx maturing Dec 2025 NC6m that pays 6.3%. Domestic MTN.

       

    • Ally Financial is working on a fixed callable via Insperx maturing Dec 2027 NC6m that pays 6.6%. Domestic MTN.

       

    • Ally Financial is working on a fixed callable via Insperx maturing Dec 2032 NC6m that pays 6.95%. Domestic MTN.