USD Vol: Implieds climb higher with selloff, realizeds

Implieds climb higher with selloff, realizeds

Treasuries have sold off further to start the week, after the strong NFP Friday jolted the markets. Swap rates are up to 15bps higher, led by the 3y. The vol surface is climbing higher as well, with 3m expiries anywhere from 4.5 to 9 normals higher, led by the ULC. Shorts that had been set into FOMC have likely been stopped out, sources suggest. “The market got too dovish,” explained one trader.

The right side of the vol surface is also higher today, with 3m and 6m expiries in longer tails around 3.5 to 7 normals firmer on the day. That said, one source pointed out that “the long end is lagging the realized moves, but is vol is still going up" and therefore, he considered that “unless the rate move catches up, some downside remains.”

In interbank activity today, 2y1y traded at 129bps, 130bps (in a switch versus 3y1y at 151bps), and then traded up outright at 133bps, 6m1y dealt at 55.5bps, 57.25bps and then up at 58bps, 1y1y traded at 96.5bps, 3m2y dealt at 92.5bps at the start of the day, 1y2y dealt at 192bps and 3m1y dealt at 37bps, according to the SDR.    

Further to the right, 1m5y dealt at 115.5bps and then up at 119bps, 3m5y traded at 214bps, 1m10y traded at 198bps and 200bps and 3m10y traded at 367bps.

In longer expiries - which are up anywhere from 0.5 to 2 normals - 2y4y traded at 460bps and then up at 462bps, 2y10y dealt early at 920bps, 2y5y traded at 552bps, 1y20y versus 3y20y dealt as a switch at 1055bps and 1666bps, respectively, and 2y20y traded at 1426bps, according to the SDR.

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.

Downside risk blunted; 6m1y 1x2 receiver spread – Barclays   

Analysts at Barclays view that downside tail risk is “getting curtailed” after the FOMC and payrolls:

"The main take-away for us from Fed Chair Powell’s press conference…was that the Fed does not have a disagreement in principle with the path of forward rates being priced by the  market, where rate cuts are expected starting the second half of 2023…  The implication is that if inflation were to realize as the inflation market is pricing, the Fed is likely to start a shallow cutting cycle later in 2023. This limits tail risks in our view and increases the likelihood of a soft landing, and means that interest rate volatility can continued falling even after its sharp drop in the second half of January."

Meanwhile, with the strong payroll print, Barclays argues that “the probability of a hard landing and a sharp cutting cycle should be lower” and “given the linkage between the inflation path and the forward rate path made by the Fed, there should now be greater anchoring around the path of fed funds rate over 2023 and 2024.”

With this backdrop, Barclays views the post-payroll rise in vol should reverse because:

“Hiking pauses that are quickly followed by recessions tend to be followed by an increase in volatility, while hiking cycle pauses (mainly recent ones, such as in 2000 in 2006) that occurred while economic data were still relatively strong are associated with falling volatility.”

 

…”the combination of strong labor market data without inflation surprising to the upside in recent months, and the Fed indicating a preference for a soft landing reduces the likelihood of a hard landing…Overall, the combination of the FOMC’s message and the labor market data means a further decline in implied vols.”

 

“In Fed-sensitive parts of the vol surface, such as 6m1y, higher-strike vols have been lower than lower-strike ones, which suggests that the market has been more concerned about downside risk, although somewhat less so in recent days.” However, “delivered skew has been consistently positive (LHS volatility tends to fall with lower rates and rise with higher rates)” which means that the skew has been “pricing in an additional downside vol risk premium, which should fade as the subjective probability of a 2023 hard landing has decreased.”

As for trades with this backdrop, Barclays favors shorting low-strike vol in the top to mid-left of the vol surface – such as 6m1y 1x2 receiver spread struck at ATM and ATM-35. “The structure is nearly premium neutral, short vol, and somewhat short duration at initiation” and terminally, “the trade has a maximum payoff if the path of rates ends up 25bp lower than current forwards, which would be consistent with the path that the Fed could follow if its inflation forecasts prove to be high and inflation returns to its target by end of 2023, as is priced by the market,” Barclays highlights.  

New structured notes

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

• 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 6.12%. Announced Feb 6.

   

• IBRD sold a $100m 10y NC2 fixed callable (non-Formosa). The EMTN matures Feb 2033 and is callable annually starting Feb 2025 and pays 5%. Lead WFS. Announced Feb 6. 

   

• Deutsche is working on a self-led $10m fixed callable maturing Feb 2038 NC3 that pays 5.4%. EMTN.

   

• Citigroup is working on a self-led $14m fixed callable maturing Feb 2028 NC1 that pays 5.1%. Domestic MTN.

   

• ING Bank is working on a self-led $70m fixed callable maturing Feb 2028 NC2 that pays 5.36%. EMTN.

   

• Standard Chartered is working on a self-led $71m fixed callable maturing Feb 2028 NC2 that pays 5.35%. EMTN.

   

• Standard Chartered is working on a $40m fixed callable maturing Feb 2028 NC2 that pays 5.5%. Lead N/A. EMTN.

   

• ING Bank is working on a self-led $15m fixed callable maturing Feb 2028 NC2 that pays 5.12%. EMTN.

   

• Natixis is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.05%. EMTN.

   

• UBS is working on a self-led $10m fixed callable maturing Jan 2024 NC2m that pays 5.08%. Credit-linked. EMTN.

   

• UBS is working on a self-led $25m fixed callable maturing Jan 2024 NC2m that pays 5.49%. Credit-linked to Deutsche. EMTN.

   

• UBS is working on a self-led $25m fixed callable maturing Jan 2024 NC2m that pays 5.6%. Credit-linked to Barclays. EMTN.

   

• UBS is working on a self-led fixed callable maturing Jan 2024 NC2m that pays 5.05%. Credit-linked. EMTN.

   

• UBS is working on a self-led $10m fixed callable maturing Jan 2024 NC2m that pays 5.08%. Credit-linked. EMTN.

   

• Toronto Dominion is working on a self-led $50m fixed callable maturing Feb 2024 NC9m that pays 5.2%. CD format. Domestic.

   

• Societe Generale is working on a self-led fixed callable maturing Feb 2028 NC2 that pays 5.1%. EMTN.

   

• Wells Fargo is working on a self-led step-up callable maturing Feb 2027 NC1 that pays 4.9% to Feb 2025, 5.1% to Feb 2026 and 5.6% thereafter. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 4.9%. Domestic MTN.

   

• National Bank of Canada is working on a $10m fixed callable via Daiwa maturing Feb 2033 NC1 that pays 5.67%. Putable Aug 2023. EMTN.