USD Vol: Vols plunge; 1y1y breaches 100bps; To buy or sell?
Vols plunge; 1y1y breaches 100bps; To buy or sell?
Treasury yields have plunged 10 to 20bps lower in a bull steepening move after NFP showed solid but lower gains while wages dropped more than expected. Vols cratered in with 1y1y trading down at 100.5bps, 100bps and then down at 99bps after the number, breaking down past the September lows to levels not seen sine last June.
3m to 1y expiries are down anywhere from 4 to 7 normals lower while 5y expiries on out are down 1.25 to 2.5 normals.
However, even with 1y1y going down to now around 128 annualized or 8bp/day breakeven or 0.5bp/day lower, one source believed that the level compared to historical levels is “still really high” and thought the upper left did cheapen up this week, it is “still priced very aggressively.” The source pointed out that prior to the Fed hiking cycle, 1y1y was more around 100 annualized on average and that it far exceeded the GFC highs last year.
Vol has a tendency to “overshoot on the upside as it is difficult for the market to judge how much to price on the top end… but if you think that the Fed is nearly finished and will be holding rates steady or with a bit of easing, then can 1y1y go back down to 120 or 100? Sure, I think they can,” the source remarked.
On the other hand - despite this week’s solid cheapening of the vol surface - another source still argued in favor for gamma longs. “The natural level of realized volatility is still very high and on the supply side, I don’t see many significant sellers of vol – callable issuance remains low and the outlook for vega supply looks very light,” the source remarked.
ULC sees interbank activity post NFP
In interbank activity today, besides the 1y1y, 18m1y traded 125bps, 1m2y dealt at 57bps, 3m10y traded at 768bps, 2y10y traded at 1046bps, possibly versus 2y1y at 142bps in a switch, and 1y2y traded at 197bps earlier and then dealt at 200bps, potentially versus 1y1y at 100bps and 6m2y dealt at 136bps, according to the SDR.
1m5y traded at 127bps, 8y1y traded at 215bps, 1y10y traded at 777.5bps, then 775bps and last at 772bps, 10y10y traded 1626bps, 2y2y traded at 279.5bps, 1y3y traded at 286.5bps and 288bps early on, according to the SDR.
New structured notes
For a complete review of USD MTN activity over the past two weeks, please see USD MTNs.
- DBS sold a $90m 15y NC4 zero coupon callable (non-Formosa). The EMTN has an estimated IRR of 5.05%, matures Jan 2038 and is callable annually from Jan 2027. Lead N/A. Announced Jan 5.
- Standard Chartered sold a $40m 15y NC5 zero coupon callable (non-Formosa). The EMTN has an estimated IRR of 5.68%, matures Jan 2038 and is callable annually from Jan 2028. Lead N/A. Announced Jan 6.
- Natixis sold a $130m 15y NC6 fixed callable. The EMTN pays a 5.46% coupon, matures Jan 2038 and is callable annually from Jan 2029. Announced Jan 5 and self-led.
- IBRD sold a $50m 15y NC4 fixed callable. The EMTN pays a 4.94% coupon, matures Jan 2038 and is callable annually from Jan 2027. Announced Jan 6 and lead is JPM.
- Citigroup is working on a self-led fixed callable maturing Jan 2033 NC2 that pays 5.8%. Domestic MTN.
- Standard Chartered is working on a self-led $15m fixed callable maturing Jan 2038 NC2 that pays 6.11%. EMTN.
- Credit Agricole is working on a self-led fixed callable maturing Jan 2033 NC2 that pays a 5.7%. EMTN.
- Asian Development Bank is working on a $50m fixed callable via Nomura maturing Jan 2038 NC2 that pays 4.95%. EMTN.
- Bank of America is working on a self-led fixed callable maturing Jan 2028 NC1 that pays 5.4%. Domestic MTN.
- Barclays is working on a self-led fixed callable maturing Jan 2033 NC1 that pays 5.75%. GMTN.
- UBS is working on a self-led fixed callable maturing Jan 2024 NC3m that pays 5%. Domestic MTN.
- Toronto Dominion is working on a self-led fixed callable maturing Jul 2024 NC3m that pays 5.25%. GMTN.
- National Bank of Canada is working on a fixed callable via Insperx maturing Jan 2028 NC6m that pays 6%. Domestic MTN.