EUR Vol: Repricing continues; Payer spreads eyed

Repricing continues
The repricing of euro vol, led by the left-hand side, continued today with pieces across the upper left corner dropping by a further 5-8 normals.

As a result, areas of the grid such as 3m2y have retraced around three-quarters of the post-SVB surge. For instance, 3m2y was today marked at 136.2 (-6.7) having soared from around 120 to above 180 in recent weeks.

In the background, the Euro Stoxx has finished the session near flat following a rocky start to the week after OPEC announced an unexpected cut to output and sent Brent soaring over $5 to around $85 last.

In rates, euro fixed income was under selling pressure first thing amid higher oil prices and ahead of this week’s sovereign supply. However, the Bund rallied alongside global fixed income during the afternoon session following weaker US ISM data with the 10y Bund yield last marked 2.25% (-3.5bps).

Back in euro vol, one trader reckoned the freefall in implieds could be nearing its limits, at least in the short-term, "We've come a long way back down pretty quickly... Possibly it will stall towards the end of the week as people look for protection over the long weekend," he reckoned. 

For euro option trades on the SDR see here and for volumes please see here. Note that the Total Derivatives SDR now shows broker/platform information for each trade, where available.

Left tail the new protagonist - BNPP
In a strategy note BNP Paribas declares the left tail is the new protagonist and recommends buying ATMF +30bp 1X2 payer spread on 6m10y, entry at -44 cents, targeting 214 and a stop at -250. It calculates carry over 3m at 60 cents. In its summary, the bank writes:

• “Risk-off has caused pronounced moves higher in vol but was heavily confined to the top left of the grid. Rates vs implied vol correction has flipped negative, causing receivers vol to go bid. This inverted correlation is a dynamic that could persist, we believe.

  
  

• “Yields will struggle to break previous highs, in our view, as increases in rates will be countered by increased market concerns over what might be the next thing to break. For this reason, we think the strong moves to the topside of the rates distribution have a natural circuit-breaker effect.

  
  

• “Acute crises tend to cause credit to tighten, negate the need for further rate hikes and have a dampening effect on inflation. Our view is that the near-term distribution on interest rates has a significant left-sided skew.”

New structured issuance
For a summary of recent issuance, please see EUR MTNs: Issuance subdued but some deals print.