Top right leads amid curve steepening
A selloff in longer-dated rates lent support to the right-hand side of the grid today with 30y gamma outperforming other pieces.
The selloff in rates saw 10s/30s bear steepen by 6bps to -60bps while Bund spreads tightened after the DFA announced its 2023 funding targets, see here.
The move saw 30y gamma pieces gain up to 3 normals, such as 2m30y marked up 3nvol at 107.2. In contrast, the top left of the surface underperformed with pieces such as 1m2y being marked down by 3.5 vol at 111.6 towards the close of session.
Elsewhere, vega was unchanged to slightly lower. For example, 10y10y is being marked unchanged at 82.0 normals. Meanwhile, the number of structured deals hitting the screens remains subdued with just a couple of small-sized callables arriving in recent sessions (see the section below for latest).
Tactically neutral gamma - JP Morgan
In its latest rates weekly JP Morgan includes a discussion about market liquidity and also the ECB’s policy outlook. Overall, the bank finds gamma implieds to be at broadly fair levels. It writes:
- ”Market liquidity is likely to increase after the holiday season - 2022 has been a very poor year for market liquidity which has continued to hover around historical lows. It is typical for market depth to plummet around year-end and then pick-up in the new year. We would expect this dynamic to continue despite already low levels for this metric. We do not expect market depth to return to its historical averages, but some increase in January is likely.
- “We should get further clarity on the ECB’s view on its terminal rate and the remainder of the hiking cycle at the December meeting. A 2025 core-inflation forecast at around 2% would suggest that the bulk of the hiking cycle is complete (after the 50bp expected hike in December) and the ECB is closer to the peak terminal rates. This should reduce further uncertainty around the peak rates…
- “We find gamma implieds to be broadly fair around current levels in our long-term fair volume model… For now, we stay tactically neutral.”
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