EUR Vol: Right-side rebounds; More KfW callables

Computer lines code 30 Jan 2023
The right-hand side managed to rebound after lagging earlier in the week. New structures brings more KfW callables.

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  • Right-side rebounds 
  • Payer spreads - Barclays
  • New structured issues

    Right-side rebounds
    The top right of the grid played catch-up today after underperforming the left-hand side earlier in the week. In the underlying, rates began the session selling off with the 10y Bund yield testing recent highs around 2.55% before rallying back and the 10y future last trading near unchanged. 


    Back in vol, pieces such as 3m10y are up by 1.8 normal while across the left hand side 3m2y is up by a similar amount today. "The right side has still underperformed overall on the week," one trader pointed out. "Today's rebound doesn't seem that convincing. There is perhaps not the same nervousness in the euro market as there is in the dollar market about longer-dated yields breaking out and into a higher range," he reckoned. 

    Elsewhere, vega has nudged up to 0.3 normals higher. "There's not been a great deal we've seen today," reported one source, adding it was possibly gaining alongside the move in gamma. 


    Meanwhile a few more calalbles continue to hit the screens including a couple more KfW structures (see below). 

    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.


    Payer spreads - Barclays
    In latest weekly rates research Barclays recommends 1x2 3m10y payer spreads for a drift in rates rather than a sharp sell-off. The bank writes:

    • “We recommend a EUR 3m10y 1x2 costless payer spread struck at ATM vs ATM+28 as a trade to position for a limited sell-off with short vol and skew exposure. The richness in 3m10y payer skew allows the structure to be priced with a comfortable breakeven at 3.55% and can benefit our short skew exposure if implied levels converge with realized vol rate relationship.

    • "Near term, the structure has a MTM long duration exposure at initiation, which means that downside surprises would not hurt the trade. In the medium term, if the market rallies into the next three months, the structure will not lose and could even benefit from the lower vol.

    • “The structure has the optimal payoff in a 30bp sell-off and will only lose if the 10y rate breaches 3.55%, which is a level that was not reached even last October and December, despite the UK LDI episode, high inflation and the BoJ’s loosening of yield curve control. Even in a bearish scenario where the market priced in an ECB overshoot at 3.75% or more, the fact that the curve is likely to be inverted should cap long-end rates.”


    New structured issues

  • KfW issued €40m 10y NC1 callable due Feb 2033. Coupon pays 3.85% with single call in Feb 2024. Led by Deka.

  • KfW issued €50m 10y NC1 callable due Feb 2033. Coupon pays 4.0% with single call in Feb 2024. Led by Morgan Stanley.

  • IBRD issued €10m 6y NC1 Sustainable-linked callable due Mar 2029. Coupon pays 3.31% with single call in Mar 2023. Led by DZ Bank.

  • RBC issued EUR CMS-linked note due Mar 2035. Linked to EUR 20y CMS. Further details unavailable. Self-led.

  • RLB Oberoesterreich issued €50m 15y NC7 callable due Feb 2038. Coupon pays 3.41% with single call in Feb 2030. Self-led.

  • BayernLB issued €3m 8y NC3 callable due Feb 2031. Coupon pays 4.095% with single call in Feb 2026. Self-led.

  • Citigroup issued €5.19m 3y NC2 callable due Feb 2026. Coupon pays 2.75% with single call in Feb 2025. Self-led.