USD Vol: ULC bumps higher; Longer tails lag
ULC bumps higher; Longer tails lag
Treasuries have come off the highs of the day after the knee-jerk bull steepening seen this morning after the weaker ISM print. Swap rates are last around 3 to 7bp lower on the day. The negative correlation to rates has continued for ULC vol, with vols rising with the underlying rally this morning, but are now off the highs of the days as the underlying rally has given back some.
The ULC remains the most volatile, with 3m expiries 4-8 normals higher in 1y and 2y tails. In comparison, 3m expiries for 5y tails and 7y tails are marginally higher on the day while 10y-30y tails are slightly lower on the day. In addition, liquidity for the ULC remains sparse, due to the vol of the vol, sources note. It used to be that you could traded 1y1y in lots of “$250m, $500m or $1bn” one source pointed out, but nowadays “$100m” is more or less the size. In the same vein, the trader suggested that dispersing 25k of risk in 10y tails was far easier to do than 25k of 1y1y.
In trading activity today, in the ULC, 2y1y traded at 156bps, 1y1y dealt at 128bps and last at 127bps, 3m2y dealt at 145bps and 1m2y at 100bps. To the right, 1y5y traded at 472bps, 3m10y traded at 418bps, 1m10y traded at 274bps and 276bps, 2wk10y dealt at 194bps, 1y10y traded at 753bps and 1m30y dealt at 462bps, according to the SDR. In longer expiries, 5y10y traded at 1385bps and 2y10y dealt at 1005bps.
In skew, 2y1y 100bp each way traded at +5.25bps, according to the SDR. Meanwhile late yesterday, 1y10y 100bp each way dealt at +28bps, 1y1y 100bp each way dealt at -5bps and 3m2y 50bp each way traded at -9.5bps, according to the SDR.
For USD option trades on the SDR see here and for volumes please see here.
Mean/modal may stay where it is – Citigroup
Analysts at Citigroup pose the question “Is it possible the skew and tails risks shift back (e.g., richer puts and payers) in a large sell-off, perhaps if inflation remains sticky or strengthens?” The bank does not think so “as call skew would likely be bid further on any increase in rate hike expectations as the market braces for a policy mistake.”
“The market doesn’t just see the recent bank stress as why the Fed needs to cut – it’s a possible canary in the coal mine,” Citigroup judges, and instead, it views that “the market now appreciates that downside tail risks have grown which, in our view, should keep the mean/modal spread where it is today.”
For example, it can imagine the Fed hiking a few more times, which is the bank’s base case, “but the market would simply push back rate cuts, out to 2024, instead of pricing them out completely” and “effectively, the market is aware that front-end receiving works well up to two months prior to the final hike, which should keep the mean expectation below the modal.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Barclays is working on a self-led fixed callable maturing Apr 2025 NC6m that pays 5.1%. GMTN.
- Barclays is working on a self-led fixed callable maturing Apr 2028 NC2 that pays 5.15%. EMTN.
- HSBC is working on a self-led fixed callable maturing Jan 2024 NC6m that pays 4.92%. EMTN.
- HSBC is working on a self-led step-up callable maturing Oct 2033 NC1 that pays 4.2% to Oct 2023, 4.25% to Apr 2024 and 4.3% thereafter. EMTN.
- Royal Bank of Canada is working on a self-led CAD extendible with initial maturity Apr 2026 and then extendible to Apr 2033 that pays 5.42%. Canadian.