Switches in ULC, skew; DTCC data grumbles
Treasuries have held within a relatively tight range today after yesterday’s double-digit selloff. Realized volatility is much lower today with swap rates 1 to 3bps lower on the day. The vol surface, however, is a touch higher with gamma in the ULC around 1 to 1.5 normals higher on the day.
“The ULC won’t go down and every time there are a couple of days where it is lower, it always goes back up,” remarked one source. The dynamics of supply and demand are playing a role in the bid side interest, the source pointed out, due to corporate and commercial demand for the ULC such as for caps and floors.
Meanwhile, sources say that adjusting the SDR data feeds for the latest changes by the DTCC data that happened over the weekend is occupying market participants.
In trading activity today, 1y1y versus 1y2y traded as a switch at 117bps versus 227bps, respectively, and 1y2y versus 3y2y traded also as a switch at 227bps and 355bps, sources say. One trader highlighted that switch activity has been increasing into year end, likely as outright risk position taking wanes and desks are more focused on “tidying up.”
Elsewhere, in floors, a 3y 0% traded at 16bps today, after a 5y 0% floor dealt at 58bps on Friday, sources say. In skew today, a 1y10y 50bps each way risk reversal versus a 2y10y 100bp each way risk reversal traded at a spread of 20bps, sources say. In The ULC, 1y1y 50bps each way risk reversal is last around flat offer, so are still receivers over in the ULC, a source noted.
Vega is roughly unchanged today after seeing a decent bid yesterday, one trader pointed out. Yesterday saw 15y10y trade at 1750bps while 5y20y also dealt at 2240bps or roughly equating to a gain of around 1.25 normals. Today, 10y30y dealt at 3385bps, sources say.
Deutsche: Left to right migration but unresolved risks remain
Analysts at Deutsche believe that Friday’s payroll numbers were a “correction” to the Wednesday Euphoria post-Powell. “The upper left corner vol, which declined by more than 7bp since the pre-Powell speech, had a marginal uptick on Friday morning,” the bank points out.
Going forward, Deutsche sees the market “likely to refocus on the consequences of the current cycle and re-syphons the premium associated with actual rate hikes to their impact on the economy in the long run.” With this backdrop, the bank suggests vol “is likely to continue migrating from the left to the right side of the surface, but uncertainty about the long-term monetary policy still remains unresolved.”
“While the upper left corner has had the most sizeable revision from its highs, the 1y1y still represents the highest sector on the surface,” Deutsche highlights. “The current surface is elevated as risks still remain unresolved and are high relative to the beginning of the year, but dispersion of vols is compressing as risk is getting more evenly distributed across the curve,” Deutsche finds.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Societe Generale sold a $20m 10y NC4 floating callable Formosa. The EMTN matures Dec 2032 and is callable annually starting Dec 2026. Lead N/A. Pays coupon of 2y SOFR +1.6%. Announced Dec 1.
- UBS is working on a self-led step-up callable maturing Jan 2025 NC1 that pays 3.8% to 4.1% Jan 2024 and 4.3% to 4.6% thereafter. Eurodollar
- Toronto Dominion is working on a self-led fixed callable maturing Jan 2024 NC9m that pays 5.35%. GMTN.
- Toronto Dominion is working on a self-led fixed callable maturing Dec 2027 NC1 that pays 5.85%. GMTN.
- Ford Motor Credit is working on a fixed callable via Incap maturing Dec 2026 NC1 that pays 6.3%. Domestic MTN.
- Ford Motor Credit is working on a fixed callable via Incap maturing Dec 2032 NC1 that pays 6.7%. Domestic MTN.
- Verizon Communications is working on a fixed callable via Insperx maturing Dec 2029 NC1 that pays 4.7%. Domestic MTN.
- Dow Chemical is working on a fixed callable via Insperx maturing Dec 2032 NC6m that pays 5.45%. Domestic MTN.
- Dow Chemical is working on a fixed callable via Insperx maturing Dec 2027 NC6m that pays 4.95%. Domestic MTN.
- Dow Chemical is working on a fixed callable via Insperx maturing Dec 2052 NC6m that pays 5.85%. Domestic MTN.
- Ally Financial is working on a fixed callable via Insperx maturing Dec 2025 NC6m that pays 6.05%. Domestic MTN.
- Ally Financial is working on a fixed callable via Insperx maturing Dec 2032 NC6m that pays 6.45%. Domestic MTN.
- Ally Financial is working on a fixed callable via Insperx maturing Dec 2029 NC6m that pays 6.35%. Domestic MTN.