USD Vol: Vols dive lower; Gamma skew stays receivers over

Chart line 30 Jan 2023
Implieds are lower, led by the left side, amid the higher yields and better risk sentiment. Sources see gamma skew still receivers over, esp ULC.

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  • Vols dive lower; Gamma skew stays receivers over

  • ULC sticky amid murky outlook – Citigroup  

  • New structured notes


    Vols dive lower; Gamma skew stays receivers over

    Treasuries have sold off with USTs yields last around 11 to 24bps higher on the day, led by the front end. The banking sector is seeing some gains, albeit from the lows, with KBW Index last up 2.55% while First Republic shares up 11% but well off the highs of around 22%. The vol surface is down sharply after ending the week last week with two day of gains.


    The upper left is leading the move lower. For example, 3m expiries are anywhere from around 6 to 23 normals lower on the day while 6m expiries are down around 5 to 14 normals - both led by 1y tails. Overall, vols remains highly directional, with vols rising in risk-off lower yield type rallies, and selling off with higher yields and better equity tone. At the same time, “you are still seeing big realized moves,” noted one source.  


    In interbank activity, starting in the ULC, 1y1y traded at 134.5bps, 6m1y traded at 116bps, 2y1y traded at 159bp, 2y2y traded at 277bps versus 2x4 CFS at 347bps in a wedge at 70bps, 2y2y traded at 300bps earlier, outright and also versus 2y5y at 636bps.


    Further out to the right, 1y5y traded at 485bps and 486bps, and last at 484bps, 1y10y traded at 769bps and 766.5bps, 6m10y traded at 589bps, and also traded at 600bps versus 1y5y at 485bps, according to the SDR.


    In vega, 5y10y traded at 1432bps versus 10y10y at 1644bps, respectively, and 2y10y traded versus 7y10y at 1046bps and 1551bps, respectively.


    As for skew, a source noted that liquidity is still impaired, with wide markets, and gamma skew all receivers over. That said, the trader pointed out that risk reversals such as 1y1y are going a bit less receivers over more recently, with the market for 1y1y risk reversals 100bp each way as low as -5.5bps at some point, but with is last trading around -3bps or -3.5bps. Overall upper left risk reversals are “still very well bid for receivers,” the source remarked.  


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



    ULC sticky amid murky outlook – Citigroup

    Analysts at Citigroup see the resurgence of high vol last week after “a brief reprieve earlier” in the week serve as “a harsh reminder that market sentiment is unlikely to reverse quickly and the uncertainties would take time to normalize.”


    To be sure, the bank notes that past episodes of sharp front-end repricing suggests that “vol on front-end rates (2y) can stay sticky and elevated while vol on longer rates (10y) is more likely to moderate.” Citigroup finds that this particular sense “given that the need for the Fed to address both the financial stability concerns and the inflation mandate should keep the potential range of distribution for front end rates structurally wide.”


    That said, Citigroup finds it “unclear if the tighter lending conditions from the banking stress could have enough of an impact to essentially make the Fed’s inflation fight yesterday’s news” but it highlights that the market “certainly seems to think so based on the amount of rate cuts being priced in the upcoming months and the extreme richening in the receiver vol skews.”


    However, “if inflation turns out to be resolved on a forward-looking basis and the banking stress is contained, then the scenario of a Fed on pause this year would likely coincide with a normalization in vol,” Citigroup argues. 


    And “rather than trying to catch a falling knife, we prefer to remain cautious on upper-left vol and try to tactically monetize the elevated implied vols on 10y and 30y rates,” Citigroup advises.



    New structured notes

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


    • Bank of Montreal sold a $50m 15y NC9 zero coupon callable/puttable (non-Formosa). The EMTN matures Mar 2038, is callable annually from Mar 2032, and has a put in Sep 2023. Estimated IRR 5.17%. Led by BMO and announced Mar 24.


    • IADB sold a $50m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures Mar 2043, is callable annually from Mar 2028, and has an estimated IRR of 4.66%. Led by JPM and announced Mar 24. 


    • Morgan Stanley sold a $30m 15y NC3 fixed callable. The EMTN matures Mar 2038, is callable annually from Mar 2026 and pays a 5.70% coupon.  Self-led and announced Mar 24.


    • Credit Agricole is working on a self-led inflation-linked note maturing Apr 2026 that pays CPI NSA*1.5, floored at zero. EMTN.


    • Barclays is working on a self-led fixed callable maturing Apr 2024 NC6m that pays 5%. GMTN.


    • Citigroup is working on a fixed callable maturing Mar 2026 NC1 that pays 4%. GMTN.


    • Toronto Dominion is working on a self-led fixed callable maturing Apr 2027 NC6m that pays 5.6%. GMTN.


    • Royal Bank of Canada is working on a fixed callable maturing Apr 2038 NC3 that pays 5.55%. GMTN.