USD Vol: Gamma teeters back lower; Delivered outlook dims

Balancing stones
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Gamma is slightly lower as rates have come off the PCE highs and realizeds are back to lower single digits. Some see vols due for a further cheapening

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  • Gamma teeters back lower; Delivered outlook dims

  • Need to account for lognormality in gamma plays – JP Morgan

  • New structured notes

     

     

    Gamma teeters back lower; Delivered outlook dims

    Treasuries are seeing a belly led rally today, with yields last 2 to 4bps lower on the day, led by the belly of the curve. The retracement lower has produced a small cheapening of the vol surface, led by the gamma. 3m expiries are unchanged to down around 1.25 normals, led by 1y tails, 1y expiries are near unchanged to down around -.3 normal. Further out, longer expiries are roughly unchanged. 

     

    After a couple of days of high delivered volatility last week - i.e. higher PMI Tuesday and stronger PCE Friday - delivered volatility is back lower today – though the recent selloffs/higher realizeds are not far out of memory, sources say. As a result, vols remain close to home. However, with data looking lighter for the next week into tomorrow’s month end (and NFP not until next Friday), one source judged that gamma could cheapen back up should realizeds drift back down lower along with rates tracing back down from the recent highs.  

     

    Meanwhile, in interbank activity today, most trading involved longer tails. For example, 1y10y dealt at 712bps, a fly of 1y10y/18m10y/2y10y traded at 712bps, 859bps and 972bps, respectively, 1m10y traded at 220bps, and 3y10y dealt at 1134bps according to the SDR. In shorter tails, 2y5y traded at 586bps, 2y1y traded at 139bps, 1m5y dealt at 134bps.  

     

    Further to the right, in 20y tails, a switch of 1y20y versus 3y20y dealt at 1079bps and 1749bps, respectively, and a switch of 5y20y versus 10y20y traded at 2088bps and 2505bps, respectively, according to the SDR.

     

    Elsewhere, in skew, 1y30y 50bp each way risk reversal dealt at +43bps and 1y30y 100bps each way risk reversal traded at +55bps, sources confirm. 

     

    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.

     

     

    Need to account for lognormality in gamma plays – JP Morgan  

    Analysts at JP Morgan examine the outlook for delta hedged long or short gamma positions. First, the bank highlights that the vol-rate correlation (i.e., lognormality) remains “very much in force” and thus JP Morgan stresses the need to “account for the move in rates and the systematic move in normal basis point vol that would be expected alongside it.”

     

    Looking at the month-to-date performance of delta hedged short straddle returns, JP Morgan finds that “short gamma positions have generally not been profitable thus far in February, a period that has seen rates rise by over 60bp in the front end and 25-50bp in longer maturities.”

     

    However, after accounting for the rise in bp vols that might be expected to accompany the rise in ATMF rates - which it noted “one can do by assuming a constant lognormal percent-yield vol”, JP Morgan points out that “the residual returns on short gamma returns are actually positive in longer tails.”

     

    Thus, the bank concludes that “even actively delta-hedged gamma positions are likely to prove to be directional with yields because of log-normality,” and as a result “vol-rate directionality must be accounted for (or hedged) when we consider the outlook for gamma strategies.”

     

     

    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 fixed callable maturing Feb 2033 NC2 that pays 5.5%. Domestic MTN.

       

    • Citigroup is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.625%. Domestic MTN.

       

    • Citigroup is working on a self-led fixed callable maturing Mar 2026 NC1 that pays 5.5%. Domestic MTN.

       

    • Citigroup is working on a self-led fixed callable maturing Mar 2025 NC1 that pays 5.45%. Domestic MTN.

       

    • Citigroup is working on a self-led fixed callable maturing Mar 2033 NC18m that pays 5.75%. Domestic MTN.

       

    • DZ Bank is working on a self-led $20m fixed callable maturing Mar 2033 NC2 that pays 5.6%. EMTN.

       

    • Asian Development Bank is working on a $65m fixed callable via JPM maturing Mar 2028 NC2 that pays 5.35%. EMTN.

       

    • Asian Development Bank is working on a $40m fixed callable via Nomura maturing Mar 2028 NC1 that pays 5.6%. EMTN.

       

    • Asian Development Bank is working on a $50m fixed callable via CACIB maturing Mar 2028 NC1 that pays 5.62%. EMTN.

       

    • Bank of Montreal is working on a self-led USD extendible with initial maturity Mar 2024 and then extendible to Mar 2038 that pays 5.75%. Domestic MTN.

       

    • HSBC is working on a self-led $62.5m fixed callable maturing Mar 2028 NC1 that pays 5.81%. EMTN.

       

    • Standard Chartered is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.1%. EMTN.

       

    • National Bank of Canada sold a $15m floating callable Formosa. The EMTN matures Mar 2033 and pays 2y ICE SOFR +145bps. Callable starting Mar 2027 and annually thereafter. Leads KGI and SG Securities. Announced Feb 17.

       

    • NatWest sold a $10m 10y NC1 zero coupon callable (non-Formosa). The EMTN matures Feb 2033 and is callable annually starting Feb 2024. Self-led. Estimated IRR 6.42%. Announced Feb 23.  

       

    • Credit Suisse is working on a self-led $1.35m CPI-linked note maturing Feb 2025 that pays CPI +2.8%, floored at 2.8%. Eurodollar.  

       

    • Credit Suisse is working on a self-led $2m CPI-linked note maturing Dec 2024 that pays CPI +5%, floored at 3%. EMTN.   

       

    • Credit Suisse is working on a fixed callable via InspereX maturing Mar 2025 NC18m that pays 6.75%. Domestic MTN.

       

    • Credit Suisse is working on a fixed callable via Jefferies maturing Mar 2024 NC6m that pays 6.25%. Domestic MTN.

       

    • IBRD is working on a $50m fixed callable via BNPP maturing Mar 2028 NC2 that pays 5.05%. Announced Feb 23. EMTN.

       

    • IBRD is working on a $15m fixed callable via ML maturing Mar 2028 NC4 that pays 5.045%. Announced Feb 21. EMTN.

       

    • Morgan Stanley is working on a self-led fixed callable maturing Mar 2028 NC3 that pays 4.85%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.85%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Nov 2031 callable Nov 2030 that pays 5.5%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2025 NC6m that pays 5.4%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2028 NC2 that pays 5.65%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Sep 2024 NC6m that pays 5.325%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2026 NC6m that pays 5.4%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Apr 2024 NC6m that pays 5.25%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2027 NC1 that pays 5.5%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2028 NC3 that pays 4.85%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2025 NC6m that pays 5.375%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2028 NC2 that pays 5.55%. Domestic MTN.  

       

    • JP Morgan is working on a self-led fixed callable maturing Mar 2033 NC3 that pays 5.5%. Domestic MTN.  

       

    • Merrill Lynch is working on a self-led $20m fixed callable maturing Feb 2028 NC1 that pays 5.47%.  EMTN.

       

    • CIBC is working on a self-led fixed callable maturing Mar 2025 NC1 that pays 5.45%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Apr 2024 NC1 that pays 5.35%. GMTN.

       

    • CIBC is working on a self-led fixed callable maturing Mar 2026 NC1 that pays 5.55%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.75%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Apr 2024 NC9m that pays 5.3%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Apr 2024 NC9m that pays 5.4%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Mar 2029 NC3m that pays 6%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Mar 2030 NC3 that pays 5.55%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Mar 2026 NC1 that pays 5.5%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Apr 2024 NC9m that pays 5.35%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Sep 2024 NC1 that pays 5.4%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Mar 2026 NC2 that pays 5.25%. GMTN.

       

    • Bank of Montreal is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.8%. Domestic MTN.

       

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