USD Vol: Vol shorts look for a big payday

Vol shorts look for a big payday

Going into the FOMC meeting today, yields are tightly corralled in a 5bps intraday range with yields last 0.3 to 2.3bps lower. The vol surface is lower going into the FOMC, with gamma points 1-2 normal softer while vega points are unchanged to off 0.5 normal. Trading activity has been light with most squared away with positioning ahead of the afternoon event.

“Smart money has sold vol heavily in the ULC” and “they are just waiting for FOMC usual cautious speech to reap some good gains from that,” remarked one trader. Another senior trader believed that “absolutely” that short vol positions would work out post-FOMC and believed that going into this FOMC there is “very little uncertainty despite the usual hype into it.”

In interbank activity thus far today, 6m10y dealt at 486bps and then down to 483bps, 1y5y traded at 393bps, 1y10y dealt at 673bps and then down at 671bps, 1y20y dealt at 1032bps, and 10y10y traded at 1539bps, according to the SDR. Also, in a switch 6m20y versus 3m10y dealt at 767bps and 350bps, respectively.

For USD option trades on the SDR see here and for volumes please see here.  Note that the Total Derivatives SDR now shows broker/platform information for each trade, where available.

Still bullish vol – JP Morgan  

Analysts at JP Morgan continue to see the pullback in volatility as “likely a head fake,” and the bank does not expect recent declines to be sustained, for the following reasons”

”First, the recent declines in implied volatility are at least, in part, the result of year-end seasonals. But these seasonals also suggest that a rebound in implieds could be around the corner as we exit January and go into February…in 6 of the last nine years and in 3 of the last 3 years, implied volatility has risen in the 6-week period beginning in the current point in the month of January. Thus, seasonals could support a reversal going forward.”

 

“Second, in the period between the May and June meetings last year, declines in implied volatility coincided with considerable improvements in market depth. Duration weighted market depth across 2s, 5s, 10s and 30s improved from $140mn 10-year equivalents to $200mn 10-year equivalents between the May and June FOMC meetings. In contrast, this same measure is now virtually unchanged from year end levels of near $130-140mn 10-year equivalents. Thus, it would appear that realized volatility and market liquidity conditions are not likely to improve in a manner consistent with sustained declines in volatility.”

 

“Third, yield levels in all sectors remain higher than where they were in the summer of 2022. This, coupled with the lognormality of yields, suggests that resting levels of implied volatility should be higher, all else equal. But implieds have fallen to levels below that seen in the May - June period, suggesting that implieds will likely not be sustained at current levels.”

 

“Last but not least, even as the hiking cycle is slowing, the policy path remains far from clear. We expect Chair Powell to retain a hawkish tone...and expect him to push back against easing expectations that are currently priced into forwards… Should markets take heed and pressure yields higher, implieds are likely to rise in response. Thus, we see numerous reasons to be cautious about looking for volatility to drop further or even sustain current levels. Therefore, we remain bullish on volatility for now.”

New structured notes

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

• Barclays Bank sold a $100m floating rate Formosa due Feb 2028 paying SOFR +145bps. Leads on the GMTN are CTBC, E.Sun, Mega International Commercial Bank and Taishin. Announced Feb 1.

   

• IBRD sold a $50m 15y NC5 fixed rate callable that pays 4.35% due Feb 2038. Single call in Feb 2028. Lead is CIBC and announced Jan 31.

   

• ING Bank sold a S10m 15y NC3 fixed rate callable that pays 5.45% due Feb 2038. Annual calls from Feb 2026. Lead unconfirmed and announced Feb 1.

   

• Standard Chartered sold a $10m 10y NC1 zero coupon callable (non-Formosa). The EMTN matures Feb 2033 and is callable annually starting Feb 2024. Self-led. Estimated IRR 6.15%. Announced Jan 31.

   

• ING Bank is working on a self-led $20m fixed callable maturing Feb 2028 NC3 that pays 5.05%. EMTN.

   

• ING Bank is working on a self-led $60m fixed callable maturing Feb 2028 NC2 that pays 5.25%. EMTN.

   

• Bank of America is working on a self-led $25m fixed callable maturing Feb 2028 NC6m that pays 5.1%. Domestic MTN.

   

• Standard Chartered is working on a self-led $40m fixed callable maturing Feb 2028 NC2 that pays 5.55%. EMTN.

   

• Societe Generale sold a $335m 5y NC3 zero coupon callable (non-Formosa). The EMTN matures Feb 2038 and is callable annually starting Feb 2026. Self-led. Estimated IRR 5%. Announced Jan 31.     

   

• Barclays is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5.1%. GMTN.  

   

• Credit Agricole is working on a self-led fixed callable maturing Mar 2024 NC6m that pays 5%. Domestic MTN.

   

• UBS is working on a self-led $25m fixed callable maturing Jan 2024 NC2m that pays 5.55%. Credit linked. EMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5.05%. GMTN.   

   

• Toronto Dominion is working on a self-led fixed callable maturing Aug 2024 NC3m that pays 5%. GMTN.   

   

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

   

• Toronto Dominion is working on a self-led fixed callable maturing Mar 2024 NC6m that pays 5%. GMTN.   

   

• Toronto Dominion is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.3%. GMTN.   

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Feb 2024 NC6m that pays 4.5%. GMTN.   

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5.1%. GMTN.   

   

• Societe Generale is working on a self-led CMS steepener maturing Feb 2038 NC1 that pays 12% for the first two 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 60% of an initial index level throughout the life of the note. Domestic MTN.