USD Vol: 1y1y goes up then down; 1y1y, 5y10y, 3y10y risk reversals

1y1y goes up then down; 1y1y, 5y10y, 3y10y risk reversals

Treasuries are 2 to 4bps higher in yield as some decompression after yesterday’s strong rally has ensued today. On the real yield side, however, TIPS are gaining (10y BE +9.75bps) after the very strong $17bn 10y TIPS that came 4bps through. The vol surface is down slightly on the day with roughly 0.5 to 1.5 normals of cheapening across the surface.

The ULC outperformed earlier today as it saw “some follow through bids” this morning, but the quadrant has since seen those bids drop back, a trader pointed out.  For example, 1y1y traded up at 94.5bps on roughly $400m but then traded down at 93.5bps on around $600m, sources say. 1y1y then was around 92.5bps bid but then bid pulled back and it now around 92bps mid, sources note.

1m10y was also better bid this morning at 245bps but then traded down at 244bps and now is around 239bps mid. Meanwhile 1m5y traded at 137bps and 137.5bps, and in longer tail gamma, 3m30y traded at 770bps and then down at 767bps, according to the SDR and sources.

As for the ULC, one source judged that the return of the bid in the ULC reflects the quadrant “finding a floor” and seem to coincide with some fears over the debt ceiling that emerged last Friday. In addition, “6m1y and 1y1y can’t go down too much as there are a lot of cuts priced in the forwards” and “all is takes is either one Fed mistake or one market mistake” for it to realize enough to make it worth owning at these levels, one trader argued.

As for skew, 1y1y 50bp each way risk reversals traded at -0.5bps, receivers over on a total of around $1.75bn. In longer expiries, a 5y10y 100bp each way risk reversal dealt at +85bps and a 3y10y 100bps each way risk reversal traded at +72bps and then up at +76bps, with the offer lifted at the time, only to be offered on the follow later. In an ATM straddle versus strangle trade, 1y10y straddle versus 100bp wide strangle traded at 387bps versus 107.5bps, sources say.

In other interbank market activity today, 3y20y traded at 1810bps and then 1807bps, 2y10y traded at 1000bps, 7y20y traded at 2307bps, 1y30y dealt at 1452bps, and 3y1y versus 18m10y traded at 152bps and 870bps, respectively, according to the SDR and sources.  

1x2 curve cap spreads – Citigroup  

Analysts at Citigroup favor taking advantage of the high implied curve vol and the wide fwd-spot roll through 1x2 curve cap spreads.

For example, the bank points out that a costless 1y 1x2 CMS cap spread on 30s/2s “where the trade would be profitable in a modest curve resteepening and only lose money if 2s30s steepens more than 203bps from spot over the next 12 months.” Historically, “the 2s30s curve has rarely steepened by that magnitude in any 1-year period, and it has only done so on those few occurrences when the Fed was deep in an easing cycle, a scenario that is unlikely to happen until 2024,” Citigroup finds.

Analyzing various costless 1y expiry 1x2 CMS curve cap spreads, Citigroup highlights that “based on the profit/loss hit ratio, the costless 1y 1x2 CMS cap spread on 10s/2s looks to have slightly better risk/reward than the other curves.” However, it notes that the trade’s modal outcome “is to simply expire worthless due to the wide forward-spot curve spread.” 

“Hence, investors can alternatively structure the 1x2 cap spreads to collect a premium credit at the trade-off of a reduced terminal breakeven” and “given that the 1x2 cap spread actually has a curve flattening exposure at its inception that flips to a steepening exposure over time, the trade would work best in a steady gradual steepening rather than a sharp immediate steepening,” Citigroup points out.

The 1x2 cap spread is “also net short gamma and vega, which means that it would earn positive carry over time and would benefit from further decline in rates vol, which is our bias for the year,” the bank notes. Citigroup looks to implement the trade post-BoJ as due to the potential of a knee-jerk sharp steepening in the US curve which could hurt the 1x2 cap spread on a mark-to-market basis.

New structured notes

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

• Credit Agricole sold a $65m 10y NC2 fixed callable Formosa. The EMTN matures Feb 2033 and is callable annually starting Feb 2025 and pays a coupon of 5.5%. Announced Jan 18. Self-led.

   

• Citigroup is working on a self-led fixed callable maturing Jan 2028 NC1 that pays 5.5%. Domestic MTN.

   

• IBRD sold a $25m 10y NC3m fixed callable. The GMTN matures Feb 2033 and is callable May 2023 and pays a coupon of 5.95%. Lead WFS. Announced Jan 18.

   

• Barclays is working on a self-led fixed callable maturing Jan 2024 NC6m that pays 5.1%. GMTN.

   

• HSBC is working on a self-led step-up callable maturing Feb 2024 NC6m that pays 4.26% to Aug 2023 and 4.36% thereafter. Domestic MTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Feb 2024 NC6m that pays 5.1%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jan 2028 NC1 that pays 5.5%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jan 2027 NC3m that pays 5.35%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jan 2028 NC2 that pays 5.25%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jan 2026 NC1 that pays 5.1%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jul 2024 NC3m that pays 5.1%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Apr 2024 NC3m that pays 5.1%. GMTN.

   

• Royal Bank of Canada is working on a self-led step-up callable maturing Feb 2024 NC6m that pays 5% to Aug 2023 and then pays 5.1%. EMTN.

   

• Toronto Dominion is working on a self-led USD extendible with initial maturity Jan 2024 and then extendible to Jan 2025 that pays 5.14%. Domestic MTN.

   

• Royal Bank of Canada is working on a self-led CAD extendible with initial maturity Jan 2025 and then extendible to Jan 2028 that pays 5.2%. Canadian.

   

• Royal Bank of Canada is working on a self-led CAD extendible with initial maturity Jan 2025 and then extendible to Jan 2028 that pays 5.05%. Canadian.