USD Vol: Vols edge higher still as breakout nervousness rises

Options 24 Nov 2021
Gamma led a firming on the vol surface as rates edged to the top end of recent ranges, increasing focus on the potential of a breakout.

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  • Vols edge higher still as breakout nervousness rises  

  • Still bearish 2024, 2025; Systematic sellers fade further – Barclays  

  • New structured notes


    Vols edge higher still as breakout nervousness rises  

    Treasuries have stayed lower as ISM Prices Paid was latest in a long string of higher inflation readings since CPI last month. Yields are last around 3.5 to 8.5bps higher on the day, led by the belly. The vol surface is also pushing higher, in a directional move, with 3m and 6m expiries 1.5 to 4 normals higher on the left side, while the right side is lagging the firming with gains of up to around 1.5 normals.


    A source noted that vols “have held steady the last few days despite the lack of realized volatility.” And today’s test of “some key levels in rates has a precipitous feel to it,” he added, with the 10y note yield skating 4% and 5y5y forward swap up back at 3.61% again.   


    Meanwhile, in the ULC, 1y1y traded up at 102bps today, thus crossing 100bps again. The range in the 1y1y has remained a barometer for the probability Fed eases, sources note – with the 1y1y dropping from 145 annualized down to sub 115 annualized in the month of January as dovish Fed plays were all the rage at the start of the year, only to see those shorts stopped out going into CPI and 1y1y jump back up to 135 annualized – and since CPI has been in a 125-135 annualized range.  


    In interbank activity, 1m5y traded at 147bps and 148bps, 3m5y dealt at 232bps, 5y2y traded at 363bps, 3m10y dealt at 387bps, 1y10y traded at 732bps and 731bps, according to the SDR. In longer expiries, which are higher on the day by roughly 1-1.5 normals, 10y10y dealt at 1612bps, a switch of 5y30y versus 10y30y dealt at 2653bps and 3260bps, respectively, 7y15y dealt at 1937bps, and in another switch earlier in the day, 5y30y versus 10y30y traded at 2636bps and 3241bps, respectively.


    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 bearish 2024, 2025; Systematic sellers fade further – Barclays   

    Analysts at Barclays recently examine swaption SDR data over the past couple of weeks for positioning and activity trends.


    First, Barclays finds that swaption market investors are “still bearish on the Fed for 2024 and 2025.” Indeed, the bank sees that investors are still trading views through “payer-based structures at high levels, although in somewhat lower amounts than after the payroll report earlier in the month.”


    Further, Barclays points out that most payer-based structures are in the “mid-left of the vol surface” – for example, 1y2y ATM+25 versus ATM+75 payer spreads and 1y1y ATM+30/ATM+80/ATM+130 payer ladder. In comparison, Barclays notes that flows in receiver-based structures are “quieter” – with, for example, reported structures including 3y1y low strike receivers struck at 1.5% and 2y1y receiver ladder struck at 2.5% versus 1.5% vs 0.5%.


    Secondly, Barclays finds that activity “has been skewed towards buying vol” and although aggregate volumes “have fallen off from the highs of early February,” the bank’s flows indicator suggests that activity “has been skewed towards vol buying across the surface.” Indeed, Barclays sees systematic vol selling “again appears to be declining, with decreasing flows reported in 1m10y and 1m30y straddles.”


    Lastly, Barclays highlights that calendar spreads “remain popular” and likely reflects “a safe way to be short gamma” as they are limited loss.  For example, Barclays cites that “a number of long versus short expiry calendar spread have appeared in the SDR data,” with, for example, 3m5y vs 6m5y ATM straddle as well as 6m10y vs 9m10y ATM straddle.



    New structured notes

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


    • Royal Bank of Canada is working on a self-led USD extendible with initial maturity Mar 2025 and then extendible to Mar 2033 that pays 6.15%. Domestic MTN.


    • Standard Chartered is working on a self-led $55m fixed callable maturing Mar 2028 NC2 that pays 5.6%. EMTN.  


    • HSBC is working on a self-led step-up callable maturing Mar 2025 NC1 that pays 4.72% to Mar 2024 and 4.82% thereafter. Domestic MTN.


    • 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 2026 NC1 that pays 5.5%. GMTN.


    • Standard Chartered Bank is working on a fixed callable maturing Mar 2025 NC1 that pays 5.2%. EMTN.