Top left outperforms
The top left of the grid continued to outperform with 1y1y finishing around 1 normal higher at 92.5. The move follows reports earlier in the week about short covering of positions in that area of the grid, see here. Furthermore, one euro trader observed that top left dollar vol has also been struggling to sell-off in recent sessions, see here.
By contrast, short dated expiry gamma declined, such as 1m10y down by 5 normals at 105nvol. “It’s quite interesting that even with the selloff during the afternoon session we haven’t seen many bids come into the gamma market,” said one trader.
In the underlying, Bunds sold off during the afternoon following US retail data and the 10y future was last down 50 ticks while the 10y yield increased by 4bps to 2.4775% and nearing the 2.50% level for the first time since early January.
Further out, vega outperformed with the bottom right finishing slightly higher. Meanwhile a few small-sized callables continue to hit the market around 15y NC10. Shorter-in, KfW issued €100m 10y NC2 via Morgan Stanley. "I'm not sure you'd call it a seasonal increase, but here are a few more calalbles around," said one dealer.
Vol curve steepener - JPM
In its weekly rates research published the end of last week, JP Morgan recommends entering EUR 2s/10s vol curve steepeners. The bank writes:
- “We have been arguing over the past few weeks that with the last hike still at least 2-3m away with some uncertainty around it and front-end rates remaining in a range, the intermediate sector will remain the driver of the curve and this is also reflected in the volatility surface…Rapid flattening of the volatility curve reflects the market starting to price an imminent easing cycle which pulls volatility inwards the curve. We expect this dynamic to prevail this time.
- “Recent delivered volatility dynamics also supports our view as 10y swaps have been delivering around 2.5bp/day higher than 2y whereas the options market is pricing only around 0.6bp/day of premium. Thus we recommend buying 10y gamma versus 2y gamma. This implied volatility spread has increase significantly over the last few weeks but is still well below current 1m delivered volatility. Vol curve steepeners offer positive carry…
- “Risks to our view could come from the market starting to price an imminent transition to an easing cycle or return of uncertainty around the terminal rate.”
New structured issues: KfW callable, LBBW CMS