EUR Vol: Top left posts further gains

Top left posts further gains
Euro vol moved higher today as the bearish momentum continued in the underlying with yields testing new highs and the 10y Bund yield peaking around 2.59% (+5bp).

The top left outperformed as the euro front-end faced further selling pressure. Red Euribors traded up to 10bps lower, adding up to 25bps of losses over the past two sessions. The move saw 1y1y marked 4 normals higher intraday at 102nvol, before drifting back to 100.8 by the close, or 2.8 higher.

Elsewhere, right-side gamma also peaked intraday before finishing the session with gains from 0.5 to 1.5 normals. "The market feels quite relaxed here about whether we take another leg higher in yields," suggested one trader. 

Finally, vega approached the close near unchanged having earlier "seen a slight bid in sympathy" to the move higher in gamma. Last prices saw 5y5y marked at 93.3 (+0.1) and 10y10y at 75.8 (unch).  

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

Vega spread opportunity - BNP Paribas
Strategists at BNP Paribas recommend buying EUR 10y10y vs 5y5y (1:2.3 ratio) with entry at -277c, targeting -93c and stop at -368c. The carry is +19c over 3 months. The bank explains:

• “The paradigm shift in the EUR rate market during 2022 shattered many of the previously established relationships across the interest- rate vol grid. The breakdown of these historical correlations left many spreads across the grid very dislocated.

  
  

• “Markets ever-growing expectations of central bank hikes during 2022 had a particularly pronounced effect on the top left of the grid. These hike expectations, mixed with short dealer positioning in this area, caused vol in this portion of the grid to outperform strongly. As spikes in yields and vols caused clients to increase hedges and left dealers scrambling to cover shorts, vol in the top left of the grid began to detach from vols on longer-dated tenors… For example, the 1y1y point is trading 53 norm vols higher against the 10y10y point than its long-run average.

  
  

• “Whilst the shortest-dated expiries are highly dependent on realised vol and the timing of central bank hiking cycles, diagonal spreads further out the grid (e.g. 5y5y vs 10y10y) do potentially offer interesting opportunities for reversion trades in the medium term.

  
  

• “Given the new, higher vol base and with risk management pain fresh in dealers’ minds, it is unlikely that we will fully return to the levels that anchored relative value across the vol grid in the previous decade. However, as vol may moderate further later this year, we think the balance of probability points to a continued partial retracement of the 2021/22 divergence during the remainder of 2023.”

New structured issues
For a summary of recent new structured issuance, see EUR MTNs.