USD Vol: ULC and LRC skew trades; Implieds drop further

ULC and LRC skew trades; Implieds drop further

UST yields have risen again in a bear flattening move but with realized volatility coming off from the double digits that have been frequently exhibited to the mere high single digits today. The vol surface is dropping in further, with the upper left not surprisingly leading the move. 3m expiries are around 2 to 18 normals lower on the day, with longer tails seeing very muted moves compared to the still very volatile left side.

Skew has been active today. 6m1y 100bp each way risk reversals traded at -11bps and -10bps - levels seen dealing late yesterday afternoon - and sources note that gamma skews remain receivers over. Indeed, a source pointed out that even gamma on 30y tails is negative as 6m30y 50bp each way risk reversal was last -15/+1bps. 

In contrast to the short dated skews, a variety of longer dated risk reversals have traded deeply payers over, reflecting that the market believes that short term risks are that rates probe lower still (higher vol/lower rates) while for longer term (and longer tail) expiries, the higher rate/high vol dynamic remains.  

For example, 5y20y 100bp each way risk reversals dealt at +85bps, 5y30y 100bp each way +95bps and 3y30y 100bp each way at +77bps and 5y10y 100bp each way +70bps, according to the SDR. In intermediate expiries, 3y10y 100bp each way risk reversal was last 50/60bps, a source pointed out. 

Overall liquidity has been “so-so,” noted one source who felt it is “definitely a bit better but we are not there yet.” Reflecting on the past two weeks of “crazy” volatility, the trader reflected that a “fair bit off the market was caught offside” and then “the stop-loss/position reducing did its thing.”

In other interbank activity today, 1y1y traded at 134bps versus 1y30y at 1430bps, then 1y1y traded outright this afternoon at 132bps, the 1y1y 1x2 wedge traded at 30bps and the 2y1y 2x3 wedge dealt at 24.5bps, according to the SDR.

Further to the right, 1y10y traded at 764bps, 1m5y traded at 188bps, 1m10y dealt at 280bps, 7y10y versus 2y10y dealt at 1544bps and 1039bps, respectively, and 3y20y traded at 1830bps, and 5y10y versus 3y10y traded recently at 1424bps and 1208bps, respectively, according to the SDR.  

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

Probability distribution for yields shifts left – JP Morgan  

Analysts at JP Morgan highlight that “the shape or skew of the probability distribution for yields has been shifted to the left.”

Looking at an analysis of the implied distribution of Dec 3M SOFR futures, JP Morgan finds that the options markets “are pricing to an approximately trimodal distribution where in addition to a baseline distribution centered around the a rate level that prices in 75bp of rate cuts but with very fat tails, there is also significant weight assigned to distributions centered around rate levels consistent with cuts of 0bp and 50bp.”

Further, for vol-rate correlations, JP Morgan sees that “this crisis has brought about a swift change in vol-rate betas.” Before the crisis ,“for much of the latter part of the hiking cycle, lognormality was a dominant theme and normal basis point implied volatility was positively correlated to forward yields.”

“But those betas quickly turned negative during the crisis, which is no coincidence since rising banking sector stress lead to increased volatility as well as increased easing expectations,” the bank notes.

“Although it is still too early to draw definitive conclusions, there is a strong basis for expecting negative vol-rate betas to persist,” JP Morgan suggests as “vol-rate betas indeed tend to turn negative when we go from late hiking stages to easing stages, and in other words, when easing expectations increase.”

With this backdrop, JP Morgan cautions against selling volatility in the upper left “on the premise of lower rates and therefore lower volatility” and “if the moves today are any indication, implieds in the upper left 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.

• Goldman Sachs sold a $152m floating rate Formosa due Apr 2028 paying O/N SOFR +132bps floored at 0%. The EMTN was led by Mega, Sinopac and Taishin. Announced Mar 27. 

   

• Goldman Sachs is working on a self-led fixed callable maturing Apr 2027 NC6m that pays 6%. Domestic MTN.  

   

• Citigroup is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 4.8%. EMTN.  

   

• Royal Bank of Canada is working on a fixed callable maturing Apr 2030 NC2 that pays 5.5%. GMTN.

   

• Bank of Montreal is working on a fixed callable maturing Apr 2028 NC6m that pays 4.8%. CD format. Domestic.

   

• Societe Generale is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 5.74%. Credit linked. EMTN.

   

• Societe Generale is working on a self-led fixed callable maturing Jul 2028 NC6m that pays 3.39%. Credit linked. EMTN.

   

• Societe Generale is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 5.73%. Credit linked. EMTN.

   

• GM Financial is working on a fixed callable via InspereX maturing Apr 2029 NC1 that pays 5.85%. Domestic MTN.