USD Vol: Left side drops as gamma consolidates in

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Gamma is lower on the day, led by the left side amid a drop in realized volatility. Citigroup looks to sell curve vol via 1x2 curve cap spread.

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  • Left side drops as gamma consolidates in 

  • Sell curve vol via 1x2 CMS curve cap spreads – Citigroup  

  • New structured notes


    Left side drops as gamma consolidates in  

    Treasuries rallied and then sold off with the 10y back near unchanged on the day and yields up to 1bps higher last, led by the front end. Gamma has softened in with this backdrop. 3m expiries are around 0.75 to 4 normals lower, led by the left. Further out, 1y expiries are anywhere from +0.3 normal to down -0.6 normal, with the left side underperforming.


    One source saw scope for further consolidation, especially the left side of the surface, with the banking crisis appearing to see the worst behind now.


    Turning to recent trends in skew, in its analysis, Citigroup suggests richening of receiver skew, especially in the ULC, reflects “a fundamental shift and have remained or extended even more…simply because of the strong demand for tail hedges for a sooner-than-expected Fed easing.”


    On the other hand, one trader believed that should inflation come in lower this week - combined with other weaker data - then the source suggested that the vol-rate correlation could flip back positive as “the dispersion of rates” drops as the path of the Fed becomes more certain. 


    In interbank activity today, starting in the upper left, 1y1y traded at 124bps, 1m1y traded 45bps and 44bps, 1m2y traded at 92.625bps and then at 91.625bps, 6m1y traded at 97.5bps, 1y2y traded at 224bps. In longer expires on the left side, 4y1y versus 4y2y traded at 181bps and 342bps, respectively, and in CFS, 1x2 CFS traded at 149.5bps, according to the SDR.  


    In 5y tails, 1y5y traded at 453bps (possibly versus 1y1y at 124bps), 4y5y traded 753.5bps, 2y5y traded at 594bps (possibly versus 1y10y at 737bps). In longer tails, 1wk10y traded at 145bps, 2wk10y traded at 172bps, 1m10y traded at 260bps and then down at 257bps, 6m10y traded at 556bps, and 2y10y versus 1y10y traded at 992bps and 741.5bps, respectively, according to the SDR.   



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



    Sell curve vol via 1x2 CMS curve cap spreads – Citigroup  

    Analysts at Citigroup find that CMS curve caps have been well bid “given that an eventual re-steepening of the yield curve is expected in an easing cycle.” The bank notes this is reflected “by how much the curve options’ implied correlations are trading below their recent realized correlations for both the 2s10s curve and the 5s30s” as it explains “low/high implied correlation reflects CMS curve vol’s relative richness/cheapness to swaption vol.”


    Looking at past behavior of realized curve around the last hikes going back to 1995, Citigroup finds that while the correlations for 2s10s, 5s30s, and 2s30s might differ in levels, “they generally move in the same direction,” and the correlations “tend to trough around the last hike (from 2 months prior to 2 weeks after) and then trend meaningfully higher afterwards.”


    Assuming this historical pattern holds, Citigroup suggests “curve vol’s relative outperformance to swaption vol might be coming to an end depending on when we think the last hike may be.” Thus, the bank believes that that curve vol’s richness to swaption vol “could end this year” and “it continues to like monetizing curve vol via costless 1x2 CMS curve cap spreads.”



    New structured notes

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


    • Citigroup is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 5.4%. Domestic MTN.


    • Citigroup is working on a self-led fixed callable maturing Apr 2026 NC1 that pays 5.35%. Domestic MTN.


    • 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%. Domestic MTN.


    • Bank of Montreal is working on a self-led fixed callable maturing Apr 2026 NC6m that pays 4.75%. CD format. Domestic.


    • Bank of Montreal is working on a self-led fixed callable maturing Apr 2030 NC3m that pays 5%. CD format. Domestic.


    • Standard Chartered is working on a self-led step-up callable maturing Apr 2026 NC1 that pays 4.13% to Apr 2024, 4.23% to Oct 2024, 4.33% to Apr 2025, 4.43% to Oct 2025 and 4.53% thereafter. EMTN.