USD Vol: Gamma swings lower then higher; ULC leads pop

Gamma swings lower then higher; ULC leads pop

USTs have bear flattened after the CPI print, propelled by hawkish Fed talk, with the latest coming from NY Fed President Williams who stated that “lnflation is still well above our 2 percent target, and it is critically important that we reach that goal.” Rates are last around 2 to 14.5bps higher on the day with the front end leading the move. 

Gamma, which initially dove as much as 5-6 normals in the wake of the CPI event, has pushed back higher with the ULC now around 3 normals higher on the day, sources note “It was a strange reaction to CPI” at first, noted one trader, as “there was a pause” and then rates backed up into the double digits, helped along by hawkish Fed speakers which the source found to be a “major reason” for the subsequent selloff.

Thus the ULC - despite many recent attempts to sell it - is back higher, with, for example, 1y1y seeing nearly a 10 normal span from low to high today, a source highlighted. At 132 annualized currently, it is back a key level that in Q4 last year served as the floor for several bounces, before the strong selling move seen throughout January pushed it down a new low of around 113 annualized, sources point out. “Will it go higher here?” one trader wondered, noting that the intraday and daily realizeds have been exhibiting “a lot of volatility” thus making shorts difficult to hold onto despite perhaps being the right trade on a terminal basis. 

To be sure, 1y1y traded down as low as 95bps this morning post-CPI, but then subsequently traded up a 103bps this afternoon. Meanwhile as the terminal rate has edged higher still into the 5.30% range, the 1y1y 100bp each way risk reversal has widened out on the offered side, with the market last around -1.5/+1.5bps, whereas before it has been offered at -0.5bps or -0.25bps, sources say. This thus runs counter to the theory that the receiver is richening with the higher terminal rate levels, as some have suggested. Moreover, a source highlighted that buying the receiver at a negative level seems at odds with the strong directionality of 1y1y - as a lower rate level is likely to amount to a lower outright vol level. 

In other interbank activity, 1y10y traded at 680.5bps, 671bps, 675bps, then up at 691bps and was bid on, according to the SDR and sources. 6m10y similarly dealt at 503bps, then down at 501bps, then up at 505bps. Elsewhere in the ULC, 2y1y traded at 137bps, 134bps, then 139bps and 138bps, 6m2y dealt at 142bps and 143bps, 3m1y traded at 41bps, and 3m2y dealt at 100bps last, according to the SDR.  

In longer dated skew, 5y30y 100bp each way risk reversal may have dealt at +103bps and 10y10y 100bp each way risk reversal may have dealt at +88bps, 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.

Vega decline is extreme - Citigroup   

Analysts at Citigroup find that in vega space, “the decline over the past month has been the most extreme since 2009.” Indeed, the bank points out the relative cheapness of swaption vol “is apparent when compared to other market instruments that have embedded volatility exposures.”

For example, looking the strong relationship between mortgage basis and rates vol – as investors implement short vol yield enhancing strategies through both instruments - currently Citigroup finds that “swaption vol looks low relative to the mortgage basis in a QT environment,” which to the bank “highlights the high hurdle for further cheapening in swaption vol and a possible near-term normalizing retracement.”

Similarly, when comparing long-dated forward rate curves, such as the 15y15y-10y10y, to swaption vol given the meaningful convexity embedded in the forward curves, Citigroup finds that the forward curve and implied vol “have moved closely together for most of the past year (curve flattened/steepened as vol increased/decreased) until recent weeks where the cheapening in implied vol has outpaced the steepening in the 15y15y-10y10y forward rate curve.”

Given the relative cheapness of vol based on these metrics and the upside surprise in the payroll data, Citigroup expects the vol cheapening “to take a pause” and thus shifts to tactical neutral on vega.

New structured notes

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

• Societe Generale is working on a self-led CMS linked note maturing Feb 2035 NC2 that pays 10% for the first two years and then pays a coupon tied to CMS30y, capped at 10% and floored at zero. Domestic MTN.

   

• African Development Bank sold an $25m 5y NC2 fixed callable. The EMTN matures Feb 2028, is callable Feb 2025 and pays a 4.875% coupon. Lead WFS. Announced Feb 13.

   

• JP Morgan is working on a self-led fixed callable maturing Nov 2032 NC8 that pays 5.25%. Domestic MTN.

   

• JP Morgan is working on a self-led inflation linked note maturing Feb 2033 NC3 that pays CPI YoY +125bps for the first two years, floored at zero, and then pays CMS30y, capped at 10% and floored at zero. Domestic MTN.

   

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

   

• JP Morgan is working on a self-led fixed callable maturing Feb 2024 NC6m that pays 5%. EMTN.

   

• JP Morgan is working on a self-led fixed callable maturing Feb 2025 NC1 that pays 4.825%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.2%. Domestic MTN.

   

• Credit Suisse is working on a self-led fixed callable maturing Feb 2024 NC3m that pays 6.4%. Also putable Apr 2023. Domestic MTN.  

   

• CIBC is working on a self-led fixed callable maturing Feb 2033 NC5 that pays 5%. GMTN.

   

• UBS is working on a self-led floating callable maturing Feb 2024 NC1m that pays 1y ICE SOFR flat. EMTN.

   

• Toronto Dominion is working on a self-led floating callable maturing Feb 2024 callable Nov 2023 that pays FF effective +40bps. CD format. Domestic.

   

• Ford Motor Credit is working on a fixed callable via Incap maturing Feb 2025 NC1 that pays 6.3%. Domestic MTN.

   

• Verizon Communications is working on a fixed callable via InspereX maturing Feb 2030 NC1 that pays 4.8%. Domestic MTN.

   

• GM Financial is working on a fixed callable via InspereX maturing Feb 2027 NC1 that pays 5.4%. Domestic MTN.