USD Vol: 4th consecutive day lower; Skew, switches into month end
4th consecutive day lower; Skew, switches into month end
Swap rates are up to 2bps lower on the day as small delivereds have characterized the price action for the second day in a row. The vol surface, not surprisingly, is lower still, marking a down every day this week thus far. With month end, quarter end fast approaching tomorrow, gamma is down around 3 to 12 normals in 3m and 6m expiries, while 1y expiries are lower by around 1 to 6.5 normals and longer expiries are off around 0.2 to 0.5 normal. With conditions less frantic, a broader diversity of trades (ATM and OTM) have come across to trade as positions are refined and tweaked.
As usual, the left side has led the moves, and as the left side has come in from the scorching highs, the ratios left/right have come down. For example, 1y1y/1y10y was as high as 170% but is now back down to around 143% - but still above the early March levels of 120%.
Skew saw some prints today - as OTM has been robust this week into month end. In short expiries today, 3m2y 50bp each way risk reversal traded at -9.5bps and 6m1y 100bp each way risk reversal went through at -10.5bps. In longer expires, 5y10y 100bp each way risk reversal dealt at +73bps after trading Tuesday at +70bps, and 5y30y 125bps each way risk reversal went through at +109bps, according to the SDR.
Elsewhere, in ATM interbank activity, starting in the ULC, 2y2y traded at 286bps, 3m1y traded at 70.5bps, a switch of 6m1y versus 3m1y traded at 94.75bps and 70.5bps, respectively. 1y1y traded at 122bps, 2y1y dealt at 151.5bps and 1y2y traded at 226bps, according to the SDR.
Also, a switch of 1y1y versus 1y7y traded at 120.5bps and 585bps, and 7y tails have been more active today as 1y7y also traded outright at 587bps and 583bps, 1y7y also dealt versus 1y20y at 1114bps, respectively, and 6m7y traded at 446bps. In the lower left, 15y2y versus 10y2y traded at 440bps and 413bps, respectively.
In longer tails, a switch of 6m30y versus 2y30y traded at 1015bps and 1908bps, and in vega, 15y10y versus 5y10y traded at 1722bps and 1392bps, respectively, while 5y30y versus 5y10y dealt at 2684bps and 1398bps, respectively, according to the SDR.
For USD option trades on the SDR see here and for volumes please see here.
Stay long vega; ULC payer skew rich – JP Morgan
Analysts at JP Morgan continue to be biased towards long vega positions with longer expiries. “Should rates rally further, mortgage convexity hedging needs that pick up at lower rates should be supportive of longer expiry vol and negative vol-rate beta could also be supportive,” the bank finds.
Additionally, JP Morgan points out that while it saw “some callable issuance pick-up as rates rallied and dollar fell from its peak… it's still projected to be low in the near-term even in a 100bp rally, and unlikely to be a source of vega supply.”
Separately, JP Morgan notes that “payer skew in shorter expiries and shorter tails is relatively flat, out to strikes of A+100bp or so.” Thus given negative vol-rate betas which the bank expects to persist and elevated ATMF implied vol levels, JP Morgan finds that high strike payers are “rich in these sectors.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Royal Bank of Canada sold a $20m 10y FRN Formosa. The EMTN matures Apr 2033 and is callable annually starting Apr 2027 and pays 2y ICE SOFR +171.5bps. Lead KGI. Announced Mar 30.
- ING Bank is working on a $10m fixed callable maturing Apr 2033 NC3 that pays 5.5%. Lead N/A. EMTN.
- Citigroup is working on a self-led fixed callable maturing Mar 2033 NC18m that pays 5.35%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 5.5%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 4.8%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Apr 2028 NC2 that pays 5.14%. EMTN.
- Goldman Sachs is working on a self-led fixed callable maturing Apr 2026 NC1 that pays 5.5%. Domestic MTN.
- Citigroup is working on a self-led CMS-linked note maturing Apr 2033 NC1m that pays 10% for the first year and then pays a coupon tied to CMS30y. Domestic MTN.
- Toronto Dominion is working on a self-led fixed callable maturing May 2024 NC8m that pays 5.35%. GMTN.