USD Vol: Longer tail gamma leads firming; Range breakout eyed

Longer tail gamma leads firming; Range breakout eyed

Treasuries have continued to bump along with top end of the recent rate range, with the 10y note yield last 3.83% or 2.5bps higher in yield while 5s30s is last 5.6bps steeper at -14bps. Earlier, the $15bn 30y TIPS auction tailed 2bps. The vol surface is up on the day, with longer tails leading the firming in gamma.

“30y tails have been busy today” and it seems like “a lot of nervousness whether or not rates breakout higher" as they approach the highs in yields last seen in December, one source remarked. In the 10y note yield, the source pointed out that if a breakout does occur then that could signal a move up to the old high of 4.20%. However, should yields sink back lower and not breakout, “then vols will come off,” the source assessed.

In interbank activity, 1m10y traded at 202bps, 3m10y traded at 369bps, 367bps,and 365bps, 6m10y traded at 510bps and last at 512bps. In 30y tails, 3m30y dealt at 669bps after trading earlier in the day at 663bps, 1m30y dealt at 367bps and was bid on the follow, and 1y30y traded last at 1330bps. In ULC, 1m2y traded at 54.5bps, 6m2y dealt at 138bps, 1y2y traded at 197.5bps while 1y1y was last a wide 97.5/101bps market, according to sources and the SDR.

In the belly, 1m5y traded at 128bps, and 3m5y traded at 222bps early on, and 6m7y traded last at 400bps. Meanwhile in vega, 10y10y traded at 1568bps and last at 1578bps, 4y10y versus 5y10y traded as a switch at 1227bps and 1327bps, respectively, and 10y30y traded at 3185bps, possibly versus 15y10y at 1696bps, according to the SDR.

In skew, a 5y10y 300bp wide strangle traded versus the straddle at 619bps versus 2025bps, sources say.  

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.

Stronger CPI may give swaptions vols a sustained bounce – BNPP  

Analysts at BNP Paribas recently noted that “both CPI and payrolls event days continue to on average outperform their respective breakevens” as market sentiment remains “data-dependent around key US data releases.”

Before the latest CPI release, BNP Paribas argued that “a higher-than-expected print may lead to a reassessment of the fair level of the Fed’s terminal rate, triggering higher USD and higher implied volatility, likely rendering current implied breakevens too low” and given recent data and policy communication, the bank found that “investors may be too early in underweighting the importance of CPI.”

In recent analysis, BNP Paribas furthermore found that “nearing the end of the Fed’s previous tightening cycle, the final hike of a cycle can prove just as uncertain as the first.” Thus, the bank judged that an “upside surprise in CPI may lead to a material and sustainable bounce in US swaption vols.”

New structured notes

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

• Citigroup is working on a self-led $10m fixed callable maturing Feb 2028 NC1 that pays 5.35%. EMTN.

   

• Bank of America is working on a self-led fixed callable maturing Feb 2028 NC6m that pays 5.4%. Domestic MTN.

   

• Barclays is working on a self-led fixed callable maturing Feb 2028 NC2 that pays 5.52%. EMTN.

   

• Credit Agricole is working on a self-led fixed callable maturing Feb 2028 NC3 that pays 5.28%. EMTN.

   

• HSBC is working on a self-led fixed callable maturing Feb 2025 NC1 that pays 5.45%. Eurodollar.

   

• Toronto Dominion is working on a self-led fixed callable maturing Feb 2027 NC6m that pays 5.5%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Feb 2028 NC1 that pays 5.25%. GMTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Feb 2025 NC6m that pays 5.3%. Domestic MTN.