USD Vol: Implieds outpace delivereds; ULC, wedges trade

Implieds outpace delivereds; ULC, wedges trade

Treasuries have sold off from the morning highs with yields last 2 to 3.5bps higher on the day, led by the back end of the curve. The vol surface has pushed higher this afternoon, with 3m and 6m expiry gamma points around 2 to 3 normals firmer while 1y expiries are roughly 2 to 2.5 normals firmer and vega is around 0.2 to 0.5 normal higher.

It hasn’t taken much for vols to fly higher recently, sources note, and some put it down to a lack of liquidity in the markets. Others add that the threat of a breakout higher has put some premium to own vol, even if it not delivering.

One trader pointed out that delivereds have been “extremely low” and thus implieds have "definitely broken from delivered over the past month or so.”

In interbank activity today, the ULC has lit up with more activity today compared to last week. For example, the 1x2 1y1y wedge traded in good size of $1bn at 29bps, sources say. Meanwhile the 2x3 2y1y wedge also dealt at 19bps earlier, according to the SDR.

Elsewhere, 1y1y traded at 104bps and 2y1y traded at 145bps, while a 1y1y/2y1y/5y1y fly may have dealt at 104bps, 145bps and 190bps, respectively. 1y2y also dealt at 205bps, and a 1y1y versus 2y1y traded at 104bps and 147.5bps, respectively, according to the SDR.

In longer tails, 5y20y traded at 2110bps, 5y10y traded at 1377bps, 1y20y versus 3y20y traded at 1111bps and 1776bps, respectively. Also, 1m10y traded at 246bps, 15y5y dealt at 993bps, and 10y20y dealt at 2535bps and 10y15y traded at 2120bps. In a fly trade, 1m10y/3m10y/6m10y traded 241bps, 395.5bps and 542bps, respectively, according to the SDR. 

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

Receiver skews look rich  – JP Morgan   

With swap yields now close to their current cycle highs, analysts at JP Morgan examine relative value of low-strike receiver skews, and it notes firstly:

“A comprehensive evaluation of the richness or cheapness of receiver skews will need to consider low strike demand from mortgage hedgers, as well as possible vega supply in a rally. But since yields are now well above peak-negative convexity levels, and well above levels where a wave of callable refinancings would be expected to occur, we can lean on the fact that vega supply-demand flows will likely remain small and vol-rate correlations are likely to be the main driver of receiver skews for strikes that are within 100bp of current ATMF levels.”

That said, JP Morgan examines the levels for at-the-money-forward rate (%), bp vol (bp/day), A+0/A-100 receiver skew (bp/day), and expected decline in implied volatility (bp/day) under current skew, lognormal, parametrized and empirical methods. From this analysis, JP Morgan finds that “generally speaking all three approaches project larger declines in ATMF implied basis point volatility than what is currently priced into receiver skews.”

In particular, JP Morgan highlights “this difference is stark for shorter expiries, and diminishes for 5y and longer expiries.” Thus, all in, JP Morgan view receiver skews “as currently rich, and would look to underweight low strike volatility relative to ATMF or higher strikes in expiries of 5 years or less.”

New structured notes

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

• Bank of America is working on a self-led step-up callable maturing Mar 2038 NC3 that pays 5.3% to Mar 2026, 5.6% to Mar 2030, 6% to Mar 2034 and 7% thereafter. Domestic MTN.

   

• Bank of America is working on a self-led step-up callable maturing Mar 2030 NC1 that pays 5.45% to Mar 2025, 6% to Mar 2028 and 7% thereafter. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Mar 2028 NC2 that pays 5.39%. EMTN. 

   

• Asian Development Bank is working on a $50m fixed callable via WFS maturing Mar 2028 NC3 that pays 5%. EMTN.

   

• Citigroup is working on a self-led $20m fixed callable maturing Mar 2028 NC2 that pays 5.44%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Mar 2026 NC3m that pays 5.17%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.05%. EMTN.

   

• UBS is working on a fixed callable maturing Mar 2026 NC1 that pays 5.19%. EMTN.

   

• IBRD is working on a $18m fixed callable via Nomura maturing Mar 2033 NC1 that pays 5.88%. EMTN.

   

• Goldman Sachs is working on a fixed callable maturing Mar 2028 NC1 that pays 6%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Mar 2024 NC6m that pays 5.45%. EMTN.  

   

• Barclays is working on a self-led fixed callable maturing Apr 2024 NC6m that pays 5.45%. GMTN.  

   

• BNP Paribas is working on a self-led fixed callable maturing Mar 2026 NC6m that pays 5.8%. Domestic MTN.   

   

• HSBC is working on a self-led fixed callable maturing Sep 2024 NC1 that pays 4.9%. EMTN.

   

• UBS is working on a self-led fixed callable maturing Jan 2025 callable Jul 2023 that pays 6.6%. EMTN. Credit-linked.

   

• Toronto Dominion is working on a self-led fixed callable maturing Sep 2024 NC3m that pays 5.65%. GMTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Mar 2026 NC1 that pays 5.8%. GMTN.  

   

• Bank of Montreal is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 6%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.7%. Domestic MTN.

   

• Societe Generale is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.6%. Domestic MTN.