USD Vol: 1m1y skyrockets past 300 annualized
1m1y skyrockets past 300 annualized
After the overnight up to 30bps rally in USTs led by the front end, USTs are back lower with yields 5 to 11bps higher on the day. Broader equities are stabilizing (DJIA +0.89%, S&P +0.78% and Nasdaq +0.14%). First Republic shares are down -33% - though off the intraday lows of -50%) with various proposals being discussed such as converting the $30bn deposits made Friday into a capital infusion.
Reflecting near term high uncertainty, 1m1y has continued to go stratospheric, with it skyrocketing and trading this afternoon at 71bps, or around another 14 normals gain today - on top of the roughly 37 normal gain seen Friday. It is at all-time high of around 313 annualized (an astounding ~19.7bps/day).
Outside of the very top left, the vol surface is slightly lower on the day now after vols climbed early in the session. Implieds remain very anti-directional - though biased with more gains than equivalent drops (i.e. vols going much higher as rates go down, while dropping modestly versus underlying selloffs).
Indeed, today’s UST selloff has not done much of a dent to the overall high magnitude of the vol surface and vols remain extremely elevated, sources say. For example, 3m expiries are last roughly around 0.75 to 7 normals lower on the day.
As for interbank activity - starting in the upper left - 1m1y traded at 71bps, 6m1y dealt at 132bps, 3m1y traded at 103.5bps, 2y2y traded at 316bps, 1y1y dealt at 154bps, 2y1y traded at 175bps and also at 180bps early on in the session, according to the SDR.
Further to the right, 2y5y traded at 662bps, 1m10y dealt at 320bps, 3m30y traded at 857bps, 1y10y dealt at 802bps, 1y7y versus 2y7y traded at 644bps and 851bps, respectively, and 1y20y versus 3y20y dealt at 1193bps and 1893bps, respectively, according to the SDR. In vega, 10y20y traded at 2655bps.
In skew, 10y10y 100bp each way risk reversals may have dealt at +85bps while a 9m1y 300bps low receiver versus ATM looks to have traded at 8.5bps and 75bps, respectively, according to the SDR.
For USD option trades on the SDR see here and for volumes please see here.
ULC may stay elevated vs longer tails – Citigroup
Analysts at Citigroup look upon last week’s repricing in front-end rates and the expected Fed fund path as “extraordinary in terms of both magnitude and speed” as the 1-day decline in the 2y UST “exceeded the moves in the 2008 financial crisis and is the largest since October 1987.”
“The fact that the repricing occurred after the announcement of the new Bank Term Funding Program (BTFP) indicates that the market does not see a quick fix for the banking stress and now expects the Fed to fight a two-front war on inflation and financial system’s stability,” the bank points out.
“Given the uncertainties around the nature of the banking stress (contained incident or systemic problem) and the second-round effects on the real-world economy and inflation outlook, it is understandable that the market has sharply increased the potential range of distribution for front-end rates,” Citigroup says.
That said, “it is still impressive to see that the 1y1y implied vol has reached an all-time high and exceed the 2008 financial crisis level” last week and that the outperformance in front-end rates swaption vol relative to longer rates swaption vols “has been the sharpest historically,” Citigroup highlights.
Citigroup believes that intuitively that extreme repricing like this “tends to reflect a meaningful change in market sentiments that is unlikely to reverse quickly, or at the very least, the uncertainties would take time to normalize.”
Based on long-run historical data since 2004, Citigroup finds that extremely sharp outperformance in left-side vol relative to right-side “tends to suggest room for further outperformance over the next 3 months.” When filtering for instances where the 1y1y/1y10y swaption vol ratio increased by 3+ sigmas (0.12) over a week (the recent increase was 0.27), and then looking at the subsequent 3m change in the 1y1y/1y10y vol ratio, the bank finds distribution for the filtered observations “favors a subsequent increase in the left vs right vol ratio of roughly 63% to 37%.”
Thus, Citigroup suggests that the ULC “might be more resilient and not normalize as quickly as right-side vols.” Further analysis suggests that the left-side vol’s outperformance versus right-side “can continue even though the vol ratio has already reached the upper-end of its multi-year range” when looking at the historical stickiness of the front end versus long end rates.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Taiwan Cooperative Bank sold a $14m 5y CMS-linked callable Formosa. The EMTN matures Mar 2028 and is callable every 3m starting Jun 2023 and pays 5.3% for the first year and then pays 5.3%*days CMS10y is 0-4%. Lead N/A. Announced Mar 9.
- Credit Suisse is working on a self-led inflation-linked note maturing Mar 2025 that pays CPI +3%, floored at 3%. Eurodollar. Announced Mar 17.
- Royal Bank of Canada sold a $30m 15y NC10 zero coupon callable (non-Formosa). The EMTN matures Mar 2038 and is callable annually starting Mar 2032. Self-led. Estimated IRR 5.51%. Announced Mar 17.
- JP Morgan is working on a self-led CMS-linked note maturing Mar 2038 NC2 that pays 10% to Dec 2024, then pays a coupon tied to CMS30y + a spread, capped at 7.5% and floored at zero. CD format. Domestic.
- Citigroup is working on a self-led fixed callable maturing Mar 2030 NC4 that pays 4.8%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2030 NC3 that pays 5%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2028 NC3 that pays 4.82%. EMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Mar 2027 NC3 that pays 5.06%. EMTN.
- Toronto Dominion is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.75%. GMTN.
- Societe Generale is working on a self-led fixed callable maturing Mar 2028 NC6m that pays 6%. Domestic MTN.