Pace of vol cheapening abates
USTs have bandied about in a 5-10bps range with a steepening trend the main staying theme thus far. Swap rates are anywhere from 2bps lower in the front end versus 4bps higher. The final leg of the UST refunding - $18bn 30y reopening – came on near the screws, drawing a rate of 3.661%. This morning’s PPI was lower (-0.5% mom/2.7% yoy, core -0.1% mom/3.4% yoy) while equities have been stronger (DJIA +0.66%, S&P +0.81% and Nasdaq +1.47%).
The vol surface is mostly trending lower, but the slope of the softening has flattened considerably. 3m expiries are 1 to 2.5 normals lower on the day, while 1y expiries around 0.5 normal higher to 0.5 normal lower and vega is roughly unchanged.
1y1y is now 150.5 annualized, or roughly 9.4bp/day. A source noted that “even on the way down yesterday, there were some buyers of 1y1y.” However, in the meantime, realized volatility has been trending lower, though one source wasn’t sure how long that would last. “Yesterday it moved around like 8bps and today you see 6bps and it doesn’t take long for the market to calm down, but how long it stays that way ” is an open question, the source highlighted.
Interbank activity today has included 3m2y at 124bps, 1y1y versus 1y2y at 118bps and 219bps, respectively, and 3m2y versus 6m2y traded a switch at 122.5bps and 166bps, respectively, while 2m2y versus 3m2y also dealt as a switch at 107.5bps and 123bps, according to the SDR. Further out, 1y5y traded at 438bps, and 5y10y traded at 1344bps, and in longer tails, 1wk10y versus 2wk10y traded at 117bps and 150bps, respectively, 3m30y traded at 660bps, 9m20y dealt at 950bps an 9m30y versus 1y30y dealt at 1186bps and 1358bps, respectively.
In skew, 3m10y ATM versus 100bps low receiver traded at 191bps and 16bps, respectively, and with the strike on the 10y receiver at 2.07%, “that is quite low for 3 months out,” one source judged, but “some are afraid of a big move lower,” the source suggested. Elsewhere, a 2y1y straddle versus 150bps each way strangle dealt at 147bps versus 48bps and a 4m10y 100bp each way risky or strangle also may have traded (possibly at -4.5bps if a risk reversal).
Mixed views on vol and rates – Barclays
Looking at SDR data over the two weeks ending this past Friday, analysts at Barclays see mixed views on rates as well as vol. Liquidity-wise, Barclays sees “volumes in the swaption market bounced after their March decline as banking-related concerns faded.”
The bank see evidence of vol buying in the top right versus selling in the bottom right as “activity was likely biased towards buying of vols in the top right (with relatively muted systematic selling of gamma), but towards selling of volatility in the bottom right.”
Elsewhere, Barclays finds “duration views from swaption investors remain mixed” as “the relative frequency of receiver-based and payer-based structures shows little directional bias.” For example, the bank payer-based structures such as 1y2y payer spread struck ATM+25 vs ATM+75 and ATM+20/ATM+40/ATM+60 6m1y – “targeting a moderately more hawkish policy path.” On the other hand, Barclays also sees receiver-based structures such as 3m10y ATM-25/ATM-50 receiver spread and 1m10y ATM/ATM-25/ATM-50 receiver ladders.”
Lastly, Barclays finds more calendar spreads and forward vol structures being reported, such as 6m30y vs 1y30y high strike payers, and option triangles with 10y5y vs 10y25y vs 15y20y ATM payer. “Market participants appear to be initiating calendar spreads and forward vol structures again,” Barclays infers – although it notes “volumes are low.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- EBRD sold a $100m 20y NC5 zero coupon callable (non-Formosa). The GMTN matures Apr 2043, is callable every 2y from Apr 2028 and has an estimated IRR of 4.595%. Lead is Barclays and announced Apr 12.
- ING sold a $20m 15y NC3 zero coupon callable (non-Formosa). The EMTN matures Apr 2038, is callable annually from Apr 2023 and has an estimated IRR of 5.1288%. Self-led and announced Apr 12.