USD Vol: ULC leads a continued softening; 1y1y active

ULC leads a continued softening; 1y1y active   

Treasuries rallied after the strong 7y auction (2.3bps through) but have since lost some altitude and yields are last 2 to 5bps in a bear flattening move. The implied vol surface is lower, with the upper left leading the move, once again. 3m expiries are roughly 1-2 normals lower, led by the left side, while 1y expiries are down 0.5 to 1 normal.

“The ULC is underperforming today with a lot of 1y1y going through,” noted one trader. Still the source pointed out that although 1y1y has been trading lower, there have been “pesky buyers” of 1y1y with support around 90bps.

To be sure, 1y1y traded at 91bps and then at 90bps on a total of $650m. 2y1y traded at 130bps and a source noted that pieces like 2y1y and 3y1y have been a “favorite” for buyers of vol. 3y1y traded at 151.5bps and 1y2y traded at 181bps, while the 3y1y 2y1y switch traded at a spread of 23bps, according to sources.

In longer tails, 1y25y dealt at 1245bps, 5y10y traded at 1329bps, a switch of 2y20y versus 1y20y dealt at a spread of 396bps, and 1m10y traded at 225bps and 3y20y at 1729bps. Earlier in the session, 1m30y traded at 444bps and 438bps, 5y10y dealt at 1342bps with the bid hit, 1y10y dealt at 710bps, and a switch of 15y10y versus 10y10y traded at a spread of 112bps, according to sources and the SDR.

Meanwhile in skew today, the 1y1y 100bp each way risk reversal traded at -1bps, receivers over. Elsewhere, a switch of 1y10y 100bp each way versus 2y10y 100bp each way risk reversals traded at a spread of 20bps, sources say. For more, please see SDR trades.

CFS has not been as active today, one trader highlighted, though yesterday, a 3x5 0% floor did trade at 22bps, the source noted.

Higher volumes; Mixed Fed views; Carry hunt – Barclays     

Analysts at Barclays recently examined the themes gleaned from the SDR data over the two weeks ending 20 January. First, the bank finds that swaption volumes have “picked up substantially in the new year…to among the highest levels in a year.” However, the bank suggests that “there appears to have been a decline in long vol activity in the bottom right compared with a few weeks ago.”

Secondly, Barclays points out that “views on the path of Fed policy appear to be very mixed” as a “wide variety of directional structures were reported in parts of the surface that are sensitive to the path of Fed policy in 2024, suggesting that investors have a wide range of opinions on where short-tenor rates are headed.”

For example, the bank highlights “payer spreads/flies/ladders in short/intermediate expiry and short tenors (such as 1y1y ATM/ATM+50 payer spread) or receiver-based structures such as 1y1y ATM- 100/ATM-200 receiver spread and 2y1y ATM-75/ATM-150/ATM-225 receiver ladders.”

Lastly, Barclays sees evidence that investors “appear to be looking for safe ways to earn carry in the vol market.” For example, the bank sees a “number of calendar spreads and what appear to be strangles were reported in the SDR data.” For example, ATM+20/ATM-25 1m10y strangles and 3m30y vs 6m30y calendar spreads and also “multiple” 1y1y/2y1y/1y2y option triangles constructed with ATM straddles.

New structured notes

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

• Credit Agricole sold a $10m 10y NC1 zero coupon callable (non-Formosa). The EMTN matures Jan 2033 and is callable annually starting Jan 2024. Self-led. Estimated IRR 6.15%. Announced Jan 25.

   

• Standard Chartered is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.1%. EMTN.

   

• Barclays is working on a self-led fixed callable maturing Feb 2026 NC1 that pays a TBD fixed rate. EMTN.

   

• Toronto Dominion is working on a self-led $97m fixed callable maturing Jan 2033 NC6m that pays 5.25%. CD format. Domestic.