USD Vol: Vols dip lower still; Wedges, switches

Steep road
The vol surface cheapened further, led by the ULC. 2y1y 2x3 wedges traded along with a variety of outright and switches. Citi is bearish vol.

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  • Vols dip lower still; Wedges, switches

  • Bearish factors remain at play for vol – Citigroup    

  • New structured notes


    Vols dip lower still; Wedges, switches  

    Treasuries are back to near unchanged after both the probes higher and then lower have been unsuccessful. The 10y note yield is last 3.451% or just 0.2bp lower after an intraday range of 3.416% to 3.488%. The vol surface is lower, with the upper left side leading the move. “I think right now the market doesn’t see a catalyst for a material yield move,” remarked one trader, and thus vols are heading in lower.


    The source added “there was too much risk premium” priced in “before this move” and now vols are more fairly priced after the recent cheapening. That said, the trader considered that the cheapening could go “a bit more” on the left side, “otherwise I think it’s about fair.”


    3m expiries are down anywhere from 0.5 to 2.5 normals after seeing an earlier cheapening this morning of up to 5.5 normals. 1y expiries are last around 1 to 2 normals lower, led by the belly, and in longer expiries, implieds are down around 0.2 to 0.5 normal.  


    Interbank activity has been solid across the board.  In the ULC, 1y1y traded at 91bps and dealt as low as 90.25bps but last dealt back up at 91bps, 2y2y dealt at 248bps, the 2y1y 2x3 wedge traded at 20.75bps and then 21.5bps on good size, 6m1y traded at 50.5bps, 6m2y traded at 123bps, according to the SDR.


    To the right, 3m10y traded at 380bps, 381.5bps, 3m5y traded at 212bps, 3m30y dealt at 750bps, 1m10y traded at 230bps and then at 232bps (possibly versus 2y30y at 1867bps), 1y30y traded at 1404bps, and 3y5y traded at 655bps on good size, according to the SDR.


    In switches and flies, a 10y10y/15y10y/20y10y fly traded at 1562bps, 1680bps and 1778bps, respectively; 1m2y versus 1m10y traded at 50bps and 230bps, respectively; 7y20y versus 10y20y dealt at 2271bps and 2436bps, respectively; 2y10y versus 10y10y traded at 973bps and 1562bps, respectively; a 3y10y versus 7y10y traded at 1138bps and 1470bps, respectively this morning, according to the SDR.


    Later, 1y30y versus 2y30y traded at 1407bps and 1867bps, respectively; 2y30y versus 4y30y traded at 1870bps and 2410bps, respectively; and 2y20y versus 1y10y traded at 1493bps and 711bps, respectively, according to the SDR. For more, please see SDR trades.


    In skew, some 3y10y 100bp each way risk reversal traded at +67bps, sources confirm.



    Bearish factors remain at play for vol – Citigroup  

    With its bearish view of vol going into this year based on a slowing Fed hike outlook, analysts at Citigroup find that this indeed has come to pass thus far this year.


    Citigroup points out that the cheapening “has been led by the intermediate expiries, especially on the left-side” and indeed, the bank finds that the cheapening in the 1y1y vol so far in the first three weeks of the year “has been one of the most extreme when compared to all historical rolling 3-week changes.”


    Further Citigroup highlights that its forecast for “a continuing normalization in the intraday/close-to-close realized vol ratio this year should lead to some pullback in implied vols” is also playing out.


    In contrast to other bank views (see link), Citigroup still sees more room for vol to decline over the medium term, “albeit the move should be much more gradual than it has been so far” as the bearish factors highlighted should remain in place. With this backdrop, Citigroup believes that “carry and short vol yield enhancing strategies could come back into focus as inflation moderates and becomes less of a market dominating factor.”


    On a relative basis, Citigroup prefers to be short vol “on intermediate and long-end rates rather than front-end rates given that the uncertainties around the Fed’s rate policy is likely to remain throughout this year.”


    Given that the left-side versus right-side vol ratios have already retraced back to nearly par, which the bank views as an implicit floor, Citigroup sees “asymmetric risk going forward for right-side vol to underperform left-side vol.” The bank also continues to favor selling 3m strangles on the 5y5y rate “as a way to position for a relatively anchored long-term neutral rate” and this also reflects the bank’s bearish right-side vol bias, it notes. 



    New structured notes

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


    • Goldman Sachs is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.25%. Domestic MTN.


    • Toronto Dominion is working on a self-led $82.5m fixed callable maturing Jan 2024 NC6m that pays 5.3%. CD format. Domestic.  


    • Societe Generale is working on a self-led CMS steepener maturing Feb 2038 NC1 that pays 10% for the first year, then pays 10*(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 60% of an initial index level throughout the life of the note. Domestic MTN.


    • Ally Financial is working on a fixed callable via Insperx maturing Feb 2033 NC6m that pays 6.25%. Domestic MTN.


    • Ally Financial is working on a fixed callable via Insperx maturing Feb 2026 NC6m that pays 5.9%. Domestic MTN.