Very ULC drops further; Gamma softens; Skew trades
The FOMC went with a 25bps hike, omitting in its statement its outlook for “ongoing increases” and instead said that “some” hikes “may” be appropriate. In the Q&A Powell noted that tighter credit conditions can substitute further hikes. USTs bull steepened strongly with the front-end yields dropping 20-23bps with 2s10s last 8bps steeper to -48.8bps and 5s30s lifting 14bps to 12.7bps.
The vol surface started dropping in before the FOMC and has continued to soften further this afternoon. 1m1y is down around 49 normals to roughly 220 annualized, 1y1y traded down to 129bps after the FOMC or around 13 normals lower on the day to around 165 annualized. Across the surface, 3m expiries are down around 5 to 20 normals, while 1y expiries are down roughly 2.5 to 10 normals, both led by the left.
On the right side, moves have been less dramatic as the left side has led in both directions and still maintaining the high ratios of the left side vs. right side.
In trading activity, skew has been active going into the FOMC. For example, yesterday afternoon and this morning, 6m2y 150bp each way risk reversals traded at -11.5bps on good size, also yesterday afternoon 2y1y 150bp each way dealt at +4bps, according to the SDR.
Today, most recently 3y10y 100bp each way traded at +60bps right after the FOMC release. Meanwhile 6m5y 50bps each way traded right before the FOMC at -3bps and 6m10y 100bp each way traded at +6bps, according to the SDR. This morning, 3y30y 150bp each way may have dealt at +89bps, and 1y10y 100bp each way traded at +27bps, according to the SDR.
In outright ATM trades, prior to the FOMC, 1y1y traded at 137bps and then 134bps, 3y2y traded at 331bps, 2y2y versus 2y10y traded at 292bps vs 1033bps and also at 290bps vs 1033bps, respectively, 3m5y traded at 288bps and then down 284bps, 1m10y dealt at 273bps, 1m2y traded at 101bps, and 1m5y traded at 180bps.
In longer expiries, most recently, 3y30y traded at 2250bps and 10y10y dealt at 1610bps. Earlier, 10y10y traded at 1620bps. In switches, 5y2y versus 5y10y traded at 373bps and 1412.5bps, respectively, and 7y10y versus 7y20y traded at 1531bps and 2352bps, respectively, according to the SDR.
Citigroup – Bullish signal from skew
Analysts at Citigroup find it “not surprising that the short-dated vol skews across all tails have sharply declined and are now trading with receivers above payers…given the recent inverse directionality between yields and vol (vol spiking to record high as yields collapsed.”
“Skew on the 2y rate shows the most extreme asymmetry, but we also find the move in the skew on the 10y to be very telling,” Citigroup highlights.
The bank considers that “the speed of the change in the skew has informational value where specifically a sharp richening in the 3m10y receiver skew tends to be a leading indicator (2/3 of the time) for rates to rally (lower 10y yield) over the next month.”
Indeed, Citigroup’s skew indicator reached the bullish threshold as of Thursday” and is consistent with its recent analysis based on past turmoil - which suggests that the ongoing rate rally “could have more room to go.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Citigroup is working on a self-led fixed callable maturing Mar 2028 NC1 that pays 5.1%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2033 NC1 that pays 5.6%. Domestic MTN.
- Citigroup is working on a self-led step-up callable maturing Mar 2028 NC1 that pays 5.4% to Mar 2025, 5.5% to Mar 2027 and 6% thereafter. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2026 NC1 that pays 5.5%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2029 NC4 that pays 4.9%. EMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Mar 2028 NC2 that pays 5.4%. GMTN.