Vols dip further; 1y1y nearing support
The FOMC minutes were relatively sobering for a market gunning for an end to rate hikes, saying that members warned against “unwarranted” easing of financial conditions “especially if driven by a misperception by the public of the committee’s reaction function,” that would “complicate” the Fed’s efforts for price stability.
Treasury yields are up to 5.5bps lower on the day, with the belly leading the rally. The implied vol surface is lower for the second session in a row as selling volatility appears to be the theme first out of the gates for 2023. 3m to 6m gamma expiries are down anywhere from 2 to 4 normals, 1y expiries are down 2.5 to 4 normals and 5y expiries and longer are down roughly 1 to 1.5 normals.
1y1y is closing in on the 135 annualized level that has been a level it has bounced off in both November and December, sources note, with the height of the subsequent bounces getting smaller and smaller. Thus, some sources judge that the rate and vol markets maybe corralling into more range bound price action as the big moves of 2022 give way to smaller changes as the Fed outlook stabilizes.
In interbank activity today, in gamma, 6m2y dealt at 144bps, 3m10y traded at 420bps, 1m10y traded at 260.5bps and 260bps. Further out in the ULC, 1y3y versus 1y1y traded at 313bps and 108.25bps, respectively, 2y1y traded at 151bp and the 2y1y 2x3 wedge may have dealt at 28.5bps, and 7y2y traded at 419bps, according to the SDR.
Further to the right, 1y20y traded at 1251bps, 7y10y traded at 1602bps, and a 15y10y 100 each way or 200 wide strangle may have dealt.
In other skew, 1y1y 100bp each way risk reversal may have dealt at -3bps, receivers over, 1m10y 50bp each way risk reversal may have traded at +8bps, and 3y1y 100bp each way risk reversal may have traded at +5bps, and some 2x3 versus 200 wide collar traded, according to the SDR. For more, please see SDR trades.
Low callable outlook for 2023– JP Morgan
Analysts at JP Morgan expect callable issuance “to be muted” in 2023 “as the much higher level of rates is likely to continue to depress callable bond redemptions.” Indeed, “while there was some Formosa bond issuance earlier in 2022, there has been very little issuance since the hiking cycle began,” JP Morgan highlights.
As a result, the bank expects 2023 “to be mostly marked by higher rates and low callable issuance” and JP Morgan estimates that “it will take significant declines in rates for this expectation to change” as:
- “Even a 100bp rally would likely only result in modest redemptions, and a 200bp rally would be needed to spur significant call activity (and thus follow-on new issuance). Thus, vega supply is likely to remain muted as a factor in determining the evolution of implied volatility in the year ahead.”
For other analyst views on vega supply for 2023, please see link.
New structured notes
For a complete review of USD MTN activity over the past two weeks, please see USD MTNs.
- Credit Industriel et Commercial is working on a self-led $15m fixed callable maturing Jan 2033 NC3 that pays 6.02%. EMTN.
- Standard Chartered is working on a self-led $15m fixed callable maturing Jan 2033 NC3 that pays a 5.75%. EMTN.
- Standard Chartered is working on a self-led $10m fixed callable maturing Jan 2038 NC2 that pays a 6.15%. EMTN.
- Citigroup sold a $30m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures Jan 2043 and is callable annually starting Jan 2028. Self-led. Estimated IRR 6.2%. Announced Jan 3.
- Morgan Stanley is working on a self-led fixed callable maturing Jan 2031 NC2 that pays 5.25%. Domestic MTN.
- Morgan Stanley is working on a self-led fixed callable maturing Jan 2027 NC2 that pays 5.25%. Domestic MTN.
- Morgan Stanley is working on a self-led fixed callable maturing Jan 2038 NC2 that pays 5.6%. Domestic MTN.
- Barclays is working on a self-led fixed callable maturing Jan 2026 NC1 that pays 5.55%. GMTN.
- HSBC is working on a self-led step-up callable maturing Jul 2024 NC1 that pays 4.7% to Jul 2023, 4.8% to Jan 2024 and 4.9% thereafter. Eurodollar.
- Toronto Dominion is working on a self-led fixed callable maturing Jan 2027 NC3m that pays 5.6%. GMTN.