USD Vol: Implieds soften modestly; 1m1y hit down; Risk reversals

Implieds soften modestly; 1m1y hit down; Risk reversals  

Treasuries have rallied strongly from the mid-morning lows, with yields now 2-6bps lower. The $42bn 2y auction helped the bid, as it came 1.6bps through the 1pm bid side. The vol surface is ticking down lower in a modest shift outside of 1m expiries, which are down sharply in the ULC by virtue of 1m1y trading down at 19bps (or around 7 normals lower).

The rest of the surface is down anywhere from -0.5 to -1 normal, in a roughly parallel move across the surface with gamma slightly underperforming vega. Looking at the recent selling in vol, one source noted that agency paper supply has been “very short dated” for most of the notes printing such as 1y NC3. “For dealers who have to buy, and are forced to take it, they don’t want the vol and so 1y1y and CFS have been going down,” he observed.

However, amid the selling of vol, one source was happy to see “liquidity” as more vol sellers have come in when there was once a dearth of such. “It is good to see liquidity of vol sellers,” the source remarked.

That said, one trader reckoned that the market would “probably continue to see decent volatility, but as the magnitude of the move drops, vols should price that in and realizeds and vols should come in.”

In interbank activity today, 2y1y traded at 131bps, 1y1y dealt at 93bps, 1y2y traded at 186bps, 3m2y traded at 89.75bps, according to the SDR. Further to the right, 6m5y traded at 299bps, 1y10y traded in good size at 721bps, 2y10y traded at 980bps and then later at 976bps, according to the SDR. In long expiries, 5y10y traded at 1340bps, 7y10y dealt at 1467bps and then later at 1463bps, 10y10y dealt at 1565bps and 1566bps, 15y10y traded at 1673bps, and 1672bps, (with the 15y10y possibly as switches versus the 10y10y trades, respectively).

In risk reversals, 1y1y 100bp each way may have traded at -0.5bps (in over 1 yard), 9m1y 100bp each way may have dealt at +0.375bps, 2y1y 100bp each way may have dealt at +7bps, 5y20y 150bp each way may have traded at +76.5bps and 3y10y 100bp each way may have dealt at +70bps, according to the SDR.

In CFS, 3x5 collars and 2x3 CFS versus 2y1y may have seen some activity. Also, some 3y 5.5% and 4.5% caps may have seen some flows. For more, please see SDR trades.

Stay bullish gamma despite recent declines – JP Morgan  

Analysts at JP Morgan favor its bullish view on gamma despite the significant decline in implieds this year.

First, addressing the recent decline in implieds, the bank finds that “implieds became highly correlated to yields in the second half of last year, and this vol-rate relationship has persisted across different tails” but when adjusted for the 20bp decline in yields in the past two weeks, the ULC is “actually higher” than what would have been expected under the vol-rate relationship. Therefore, JP Morgan does not believe that the decline in implieds as a worrisome sign just yet, but rather, “a direct consequence of the vol-rate directionality.’ With yields biased higher in the Near term, “implied volatility will likely be biased higher as well,” especially into the next FOMC meeting, it argues.

Second, JP Morgan believes that the macro backdrop is still conducive: “It is all but certain that the Fed will slow down further to a 25 bp hike in the next meeting…but while economic data has been weaker, the labor market has proven to be resilient, resulting in some upside risk.” Also, the disconnect between the Fed's messaging and the markets is “getting more prominent as the markets price in a more dovish Fed than what the Fed-speak indicates” which “creates an unstable backdrop that is likely to support elevated delivered volatility as indeed we have been experiencing.”

Third, JP Morgan sees that “still-poor market liquidity is also likely to support elevated delivered volatility” as there are still “large daily moves in yields as the path of the Fed continues to be foggy and realized volatility remains elevated.” Lastly, the bank finds that “implieds appear mostly cheap to fair value especially in the upper left.” Thus overall JP Morgan remains bullish on gamma, favoring specifically the upper left.

New structured notes

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

• Bank of America is working on a self-led step-up callable maturing Jan 2035 NC2 that pays 5% to Jan 2025, 6% to Jan 2029, 7% to Jan 2033 and 8% thereafter. Domestic MTN.

   

• IBRD sold a $15m 10y NC3m fixed callable. The GMTN matures Feb 2033 and is callable May 2024 and pays a coupon of 5.25%. Lead WFS. Announced Jan 20.

   

• Citigroup is working on a self-led $10m step-up callable maturing Jan 2030 NC2 that pays 5% to Jan 2025, 5.25% to Jan 2027, 5.625% to Jan 2029 and 6% thereafter. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Jan 2028 NC1 that pays 5%. Domestic MTN.

   

• Goldman Sachs is working on a self-led floating callable maturing Feb 2024 NC1 that pays O/N SOFR flat. EMTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2031 NC7 that pays 4.6%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2031 NC3 that pays 4.35%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2028 NC3 that pays 4.25%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2027 NC2 that pays 4.05%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2026 NC2 that pays 4%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2038 NC2 that pays 4.75%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2033 NC3 that pays 4.7%. Domestic MTN.

   

• Bank of America is working on a self-led fixed callable maturing Feb 2028 NC6m that pays 5.1%. Domestic MTN.

   

• Barclays is working on a self-led fixed callable maturing Jan 2026 NC1 that pays 3.76%. EMTN.

   

• Santander is working on a self-led fixed callable maturing Jan 2025 NC1 that pays 4%. EMTN.

   

• Deutsche is working on a self-led fixed callable maturing Feb 2024 NC1m that pays 5.65%. Eurodollar.

   

• CIBC is working on a self-led fixed callable maturing Jan 2029 NC1 that pays 5%. GMTN.

   

• CIBC is working on a self-led fixed callable maturing Jan 2025 NC1 that pays 4.5%. GMTN.

   

• CIBC is working on a self-led fixed callable maturing Jan 2025 NC1 that pays 5%. GMTN.

   

• UBS is working on a self-led fixed callable maturing Oct 2023 NC3m that pays 4.75%. Domestic MTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Jan 2025 NC6m that pays 5.1%. GMTN.

   

• Societe Generale is working on a self-led CMS steepener maturing Jan 2038 NC1 that pays 12% for the first three years, then pays 50*(CMS2y/30y), capped at 12% and floored at zero. Conditional on the S&P 500, Euro Stoxx Bank Index and Nasdaq remaining at or above 55% of an initial index level throughout the life of the note. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5%. Domestic MTN.