EUR Vol: Top left continues to outperform

Computer data center laptop hacker 30 Jan 2023
The top left outperformed the rest of the grid. New structured issuance brings more callables.

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  • Top left outperforms 
  • Vol curve steepener - JPM
  • New structured issues: KfW callable, LBBW CMS

    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. 

    For euro 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.


    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

  • KfW issued €100m 10y NC2 callable due Feb 2033. Coupon pays 3.791% with single call in Feb 2025. Led by Morgan Stanley.

  • Morgan Stanley issued €10m 15y NC10 callable due Feb 2038. Coupon pays 4.02% with single call in Feb 2033. Self-led.

  • Barclays issued €10m 15y NC10 callable due Feb 2038. Coupon pays 4.14% with single call in Feb 2033. Self-led.

  • DZ Bank issued €15m 12y NC6 callable due Feb 2035. Coupon pays 3.59% with single call in Feb 2029. Self-led.

  • L-Bank issued €10m 5y NC1 callable due Mar 2028. Coupon pays 3.54% with single call in Mar 2028. Led by DZ Bank.

  • LBBW issued €50m CMS-linked note due Feb 2035. Coupon pays EUR 20y CMS flat floored at zero. Self-led.

  • SPIRE issued €35.4m repack due 1 Oct 2038. Pass-through and equity-linked but further details unavailable. Led by Morgan Stanley.