EUR Vol: 1m expiries retreat; Top left stays firm; KfW callable

Grid surface volatility 30 Jan 2023
In gamma 1m expiries retreated while the top left stayed firm. New structured issuance brings KfW 10y NC1.

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  • 1m expiries retreat; Top left stays firm
  • EUR vs USD vol - Barclays
  • New structured issues

    1m expiries retreat; Top left stays firm
    Euro vols were mixed across the grid today while in the underlying the Bund traded a choppy range. The future initially rallied after a decline in the ECB’s survey of consumer inflation expectations then later retreated after Fed Chair Powell said he was prepared to increase the pace of hikes.

    In gamma, 1m expiries had the biggest move and declined by around 5 normals, thus reversing much of yesterday’s gains, amid lower realised as the Bund future finished the session around 35 ticks higher. Towards the close of session normals were marked 1m2y at 120.0 (-5.4), 1m5y at 119.9 (-4.7), 1m10y at 113.0 (-6.0) and 1m30y at 97.9 (-4.1).

    Further out, the grid was mixed with the left-hand side outperforming and edging a touch higher with 1y1y finishing +0.1 at 110.9. Elsewhere, the right-side dipped lower and declined about half a normal such as 3m10y -0.8 at 112.0.

    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.


    EUR vs USD vol - Barclays
    In weekly rates research Barclays discusses whether EUR vol is really cheap relative to USD vol. The bank writes:

    • “Is euro vol really cheap relative to the uS? In general, implied/realized ratios make for poor vol risk premium proxies; we think this is because swaption traders do a very good job pricing realized volatility, making the market quite efficient. Thus, there is very little evidence that ratios can be consistently used to improve the timing of vol trades.

    • “Further, while a difference in ratios between markets does have some relationship with the performance of long/short delta hedged vol strategies, it is a poor predictor of terminal payoffs for a long/short cross-market position in unhedged options… there is essentially no predictive power in the difference between the implied realized ratios, as far as the terminal P&L of such a trade is concerned and further, it does not matter over what horizon one measures the realized vol.

    • "There are a number of macro reasons to support a view that 3m10y EUR vol should be at least as expensive as the US, including the fact that while terminal rates are uncertain everywhere, they are especially so in Europe. Long-end duration supply is a bigger issue for Europe than the US, and the dichotomy of strong inflation and a weaker economy, which is a big source of macro rate volatility, is also likely more extreme in Europe. However, implied realized ratios are not an appropriate basis to form the view, especially given the falling correlation in rates.”


    New structured issues

  • KfW issued €100m 10y NC1 callable due Mar 2033. Coupon pays 4.14% with single call in Mar 2024. Led by Goldman Sachs.