USD Vol: ULC sinks back lower; 1y1y hit down; Vol of vol rises

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1y1y has been hit down aggressively today - just after yesterday's spike higher from the post CPI lows. The vol of volatility is up significantly.

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  • ULC sinks back lower; 1y1y hit down; Vol of vol rises 

  • Still too soon for sustained vol declines – JP Morgan  

  • New structured notes

     

     

     

    ULC sinks back lower; 1y1y hit down; Vol of vol rises 

    The Treasury curve has bear steepened with realized volatility increasing in the back end of the curve to the high single digits. Meanwhile, in supply, the $14bn 20y auction came 0.3bps through the 1pm bid side (with a record low primary dealer allocation of 6.7%) while on the corporate debt side,  Amgen launched a very duration heavy $24bn 8-part to fund its acquisition of Horizon Therapeutics.  

     

    Amid this backdrop, the vol surface is reversing lower and the ULC has led the move, with gamma expiries plunging in the quadrant by a dramatic 3-10 normals. Thus, the vol of volatility - in the ULC especially - has risen significantly in the past couple of sessions. Meanwhile longer tails on the right side have held up better with a softening of around 1.5 to 3 normals in 3m to 6m expiries.

     

    Much of the activity has been in 1y1y as that has continued to be the nexus of interbank trading and proxy for Fed terminal rate bets. A source contended that the price action yesterday - with the ULC firming intraday - appeared to more have the earmarks of “stop outs” that actual buying in the post-CPI vol rise. Conversely today 1y1y has been sold in the interbank as seller re-emerged, with trading from 103.75bps, down to 103bps, then 101bps, then at 99bps  and then last at 98bps.

     

    The high fluctuation in the ULC has underscored a “degree of uncertainty still” and also points to illiquidity as “not much is trading” a source suggested.

     

    Besides the 1y1y, in the ULC, 1m3y traded at 81bps, 6m2y dealt at 142bps and 2y1y traded at 136bps. Further to the right, 1m5y dealt at 121bps, 1y5y traded at 422bps as a switch versus 3m5y at 218bps, 1m10y traded at 194bps, 197bps and 196bps, 6m10y dealt at 496bps and 2y10y dealt at 937bps, according to the SDR.

     

    In 30y tails, 3m30y versus 1y30y dealt as a switch at 652bps and 1299bps, and in vega, 10y10y traded at 1560bps this morning. In skew, a 2y1y ATM/-100bps/-200bps receiver ladder may have dealt at 69bps/27bps/8bps, 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.

     

     

    Still too soon for sustained vol declines – JP Morgan   

    Analysts at JP Morgan highlight that the recent increase in implied volatility in the past week was in line with expectations from its fair value framework. To be sure, it finds that last week, fair values for swaption implied volatility generally went up “mostly because of the rise in yields" and the week's actual increases in implieds were "very much in line with what our fair value model suggests.”

     

    JP Morgan argues that “this is very pertinent” because the bank has been highlighting “that lognormality remains very much a characteristic of our markets, and that expectations of sustained declines in implieds are likely premature as a result.”

     

    Indeed, even JP Morgan turned neutral on volatility last week  - mostly due to the underperformance of its bullish stance in January – the bank stressed that “lognormality and other considerations pointed to upside risk in implieds.” Thus, JP Morgan argues recent moves “serve to remind us that it is too soon to position for sustained declines in implied volatility” and implied volatility remains below its estimates of fair value.

     

    However, despite this upside risk to implieds, the bank remains “tactically neutral” on vol as entry levels are “less attractive to initiate outright long vol positions” and it finds that the macro backdrop overall remains “favorable to carry-seeking trades, and short gamma strategies are likely to one of the ways in which investors seek to earn carry in a rangebound yield environment, between now and the next FOMC meeting in March.”

     

     

    New structured notes

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

     

    • DZ Bank is working on a self-led $10m fixed callable maturing Mar 2033 NC1 that pays 5.65%. EMTN.

       

    • DZ Bank is working on a self-led $10m fixed callable maturing Mar 2033 NC1 that pays 5.615%. EMTN.

       

    • Societe Generale is working on a self-led fixed callable maturing Feb 2028 NC6m that pays 5.25%. Domestic MTN.

       

    • Citigroup is working on a self-led step-up callable maturing Feb 2030 NC2 that pays 5% to Feb 2025, 5% to Feb 2025, 5.25% to Feb 2027, 5.5% to Feb 2028, 5.75% to Feb 2029 and 6% thereafter. Domestic MTN.

       

    • Asian Development Bank is working on a $50m fixed callable via WFS maturing Mar 2026 NC2 that pays 4.75%. Announced Feb 14. GMTN.

       

    • Asian Development Bank is working on a $50m fixed callable via ML maturing Mar 2028 NC2 that pays 5.03%. Announced Feb 15. GMTN.

       

    • Royal Bank of Canada sold a $20m 10y NC4 floating callable Formosa. The EMTN matures Mar 2033 and is callable annually from Mar 2027 and pays 2y ICE SOFR +141bps, floored at zero. Announced Feb 14.

       

    • Goldman Sachs is working on a self-led fixed callable maturing Feb 2026 NC1 that pays 5.25%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2028 NC2 that pays 5.35%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2028 NC2 that pays 5.2%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2027 NC1 that pays 5.3%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2025 NC6m that pays 5.2%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2026 NC6m that pays 5.25%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Feb 2025 NC6m that pays 5.2%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Aug 2024 NC6m that pays 5.15%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Apr 2024 NC6m that pays 5.1%. Domestic MTN.

       

    • Merrill Lynch is working on a self-led $15m fixed callable maturing Feb 2028 NC2 that pays 5.5%. EMTN.

       

    • Merrill Lynch is working on a self-led $30m fixed callable maturing Feb 2028 NC1 that pays 5.38%. EMTN.

       

    • Barclays is working on a self-led fixed callable maturing Mar 2024 NC6m that pays 5.25%. GMTN.  

       

    • Citigroup is working on a self-led fixed callable maturing Feb 2033 NC2 that pays 5.5%. Domestic MTN.

       

    • UBS is working on a self-led fixed callable maturing Jan 2024 NC1m that pays 5.08%. Credit linked. EMTN.

       

    • Bank of Montreal is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.35%. Domestic MTN.

       

    • National Bank of Canada is working on a $10m fixed callable via Daiwa maturing Feb 2033 NC1 that pays 6.2%. Puttable Aug 2023. EMTN.