USD Vol: Vols flip back higher with selloff; ULC most acute

Vols flip back higher with selloff; ULC most acute   

Treasuries have sold off this afternoon with the large 2.5bps tail on the 10y note auction pushing yields higher, after spending this morning enjoying a relief rally as Powell said “no decision” had been made about the March hike. However, the emphasis on upcoming data on the Fed’s decision has put this Friday’s NFP and next week’s CPI under even more intense scrutiny, sources say, with event risk high for both events.  

As such, implieds remain very acutely tied to the swings of rates, and the ULC - and to a lesser extent gamma on the right side - has flipped back higher this afternoon. To be sure, 3m expiries were down 0.5 to 3 normals mid-morning with the left side leading the move. However, as rates rose back higher, with, for example, the 2y note yield back to 5.06% after a probe down to 4.97% this morning, vols on the left side are firmer once again - by around 0.5 to 2.5 normals on the day.

For example, 1y1y traded last at 112bps after trading as low as 109bps this morning. 6m1y traded last at 73bps after dealing at 70bps earlier this morning. In other activity, 1m10y dealt recently at 255bps, 1m30y traded at 463bps, and then at 460bps, according to the SDR.

Meanwhile, the lower left has seen some activity today - in switches - with 5y1y versus 4y1y trading at 194bps and 184bps, respectively, while 5y1y versus 3y1y traded early on at 194bps and 170bps, respectively, and more recently, 4y1y versus 3y1y dealt  at 184.5bps and 171bps, respectively, according to the SDR.

Elsewhere, in a fly, 4y10y/5y10y/7y10y traded at 1297bps, 1393bpd and 1524bps, respectively and in skew, a 1y5y 100bp each way may have dealt at +15.5bps. In longer expiries, 5y30y dealt at 2715bps and 10y20y traded at 2554bps, according to the SDR.  

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

Buy 2y30y versus 5y30y – Citigroup  

Looking at the reshaping of the vol surface since the beginning of the year, Citigroup finds the steepening of the vol term structure on the 30y tails “clearly stands out” and on a long-run historical basis, “the steepening of the right-side vol slope over the past two months has been one of the most extreme.”

Citigroup believes “this is due to a combination of sharp cheapening in the upper-right vol and the lack of long-maturity callable issuance that has been beneficial for bottom-right vol” while the vol slope “is typically inversely directional with outright level of vol, so the steep vol slope is a reflection of the 30y tails’ underperformance this year,” it adds.

Examining a simple regression of the 5y30y-2y30y vol spread on outright 2y30y vol over the past two years, Citigroup finds that the vol slope “is currently 2 normals too steep based on a very consistent relationship” and further it notes that current dislocation “is more than +2 standard deviations extreme” and “has strong tendency to mean revert when the regression residual reached this level in the past.”

To position for a potential normalization, Citigroup recommends buying $30m of 2y30y ATMF straddles and selling $35m of 5y30y ATMF straddles at a $60k vs $100k beta-adjusted vega weighting while receiving $4m in 5y30y swap to hedge out the net initial delta. The bank sees the primary risk to the trade “is an increase in interests for bottom-right forward vol which could cause the vol term structure to steepen further.”

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 fixed callable maturing Mar 2033 NC2 that pays 6.1%. EMTN.

   

• Citigroup is working on a self-led $10m floating callable maturing Mar 2033 NC4 that pays a O/N SOFR +121bps. EMTN.

   

• Societe Generale is working on a self-led $30m fixed callable maturing Mar 2038 NC7 that pays 5.465%. EMTN.

   

• JP Morgan sold a $50m 10y NC2 fixed callable Formosa. The EMTN matures Mar 2033, is callable annually from Mar 2025 and pays a coupon of 5.60%. Leads are Sinopac and KGI. Announced Mar 2.

   

• Barclays is working on a self-led fixed callable maturing Mar 2026 NC3m that pays 4.9%. Private placement.   

   

• Citigroup is working on a self-led fixed callable maturing Mar 2028 NC3 that pays 5.55%. Domestic MTN.

   

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