USD Vol: Pushing higher; Illiquid; Intermediates outperform

Pushing higher; Illiquid; Intermediates outperform     

Treasuries yields have stayed on the upper end of the day’s range, as any higher inflation reading has continued to push yields higher – with the latest being firmer labor unit costs. Implied vols have firmed in conjunction to the underlying selloff, with notable firming in intermediate and longer expiries as well as the right side. 3m to 1y expiries are around 1.5 to 3 normals higher, while longer expiries are firmer by around 1-1.5 normals.

“1y10y is much higher than might be expected,” one source highlighted, at around 3 normals higher on the day, even though realized volatility might not be keeping up. The source cited illiquidity as a factor today and this week, as “silly offers are being lifted.” Meanwhile, earlier in the week with month end on Tuesday, the source suggested that long positions being marked for month end saw concurrent “window dressing” type bids into the close.

Trading activity today saw a number of switches go through and appear to be positioning for "steepening/flattening vol surface trades," one source remarked. In interbank switches, 1y10y versus 2y10y dealt at 736bps and 998bps, respectively, 6m10y versus 6m25y dealt at 541bps and 917bps, respectively, 1y10y versus 1y30y traded at 731bps and 1372bps, respectively, 3m20y versus 3m20y traded at 585bps and 719bps, respectively, according to the SDR.

In outright activity, 3y30y traded at 2230bps, 3m10y dealt at 399.5bps, 5y10y dealt at 1392bps and was offered on the follow, 5y1y traded at 193bps with the offer lifted, and 1y1y traded at 104.5bps and 104bps last, according to sources and the SDR.

In skew, 3m10y 50bp each way risk reversal dealt at +16bps while a 3y10y ATM versus 150bps high payer saw a 585bps versus 215/222bps market, sources note.

For USD option trades on the SDR see here and for volumes please see here.  

New vol dynamic emerging? – Deutsche    

Analysts at Deutsche examine the instability of the Fed’s end game for hikes and the potential impact of on the uncertainty distribution along the curve:

”Currently, we do not have a clear indication as to where r* is and, therefore, what the pace and final destination of rate hikes should be. Two radically different rates paths could emerge in the short run. It is possible that the neutral rate is indeed higher, and the curve needs to adjust to it with the belly pricing in a higher terminal rate. Alternatively, if the Fed is currently approaching inflation from the perspective of squashing demand, the consequences of such an action tip towards a hard landing at a higher probability than the market believed less than a month ago. This could mean a significantly lower short rate in 2024 and a downward correction in risk assets.”

 

“Unlike a soft landing – where the effect of lower rates could partially offset the negatives of a slowdown in economic activity – in the case of a hard landing, the net effect would be negative for risk. If the Fed continues to hike deeper into restrictive territory to avoid a return of inflation, as happened in the late 1970s, the front end would likely be forced to follow that path, but the belly would position for lower rates ahead of time. In that context, the range in the belly could become widest along the curve. As a consequence, uncertainty would probably migrate from the front end to the belly.”

Deutsche finds this is “starting to be reflected” in vol surface repricing. “So far, the upper left corner has been the best performer due to the unprecedented pace and intensity of rate hikes” but “in the latest installment of vol rally in the last four weeks, we see a possible emergence of a new pattern,” the bank points out.

To be sure, “although vol was up across the board, with different sectors keeping the same betas during that time, 5y gamma has converged towards the most volatile sector, represented by 1y1y vol,” Deutsche highlights. 

New structured notes

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

• Standard Chartered is working on a self-led $15m fixed callable maturing Mar 2033 NC3 that pays 5.68%. EMTN.  

   

• Standard Chartered is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.3%. EMTN.  

   

• Bank of Montreal is working on a fixed callable via Citi maturing Mar 2026 NC6m that pays 5.6%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Mar 2030 NC1 that pays 6%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Mar 2025 NC1 that pays 5.25%. EMTN.

   

• Barclays is working on a fixed callable maturing Mar 2041 NC3 that pays 5.8%. GMTN.

   

• Barclays is working on a fixed callable maturing Mar 2033 NC3 that pays 5.75%. GMTN.

   

• Barclays is working on a fixed callable maturing Mar 2025 NC1 that pays 5.5%. GMTN.

   

• UBS is working on a self-led $35m fixed callable maturing Jan 2024 NC2m that pays 5.89%. EMTN.   

   

• Royal Bank of Canada is working on a fixed callable maturing Mar 2028 NC2 that pays 5.55%. GMTN.