EUR Vol: Top left leads decline and nears retracement

Down candle chart 26 May 2022
The top left led a decline with several pieces now nearing a retracement back to pre-SVB levels.

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  • Top left leads decline and nears retracement 
  • Receiver spreads - BofA
  • New structured issues

    Top left leads decline and nears retracement
    Euro implieds moved lower today, led by the top left of the grid. In the underlying, price action was relatively muted with the Bund future finishing the session near unchanged after trading a 77 tick range.

    The decline in top left vol has occurred despite some sources warning about further “gremlins in the closet” such as “another possible SVB or Credit Suisse”. However, one trader said there is enough interest from fast money to fade the top left, “Most clients are still quite cautious… But fast money like to play the range and have been selling, then will be quick to buy back,” he said.

    For instance, 3m2y has dropped just over 6 normals today and is nearing 120nvol for the first time since the March credit crisis. Elsewhere, 3m10y lagged behind, declining 1 normal to 103.5nvol and testing recent lows.

    In skew, one trader said there was some interest in selling payer spreads across 10y gamma tails. "Rather than outright shorts, it's another way to express we are nearing the end of the rate cycle," he said. 

    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.


    Receiver spreads - BofA
    Strategists at BofA recommend buying medium-term receiver spreads financed by selling shorter expiry receivers. It suggests buying €100m 1y5y receivers spreads ATM-15/ATM-65bp fully financed by selling 100m 3m5y ATM-15bp receivers.

    • “We have seen a significant change in 2s/5s and 2s/10s curve dynamics this year, with the front-end of the curve often leading the moves more often. For 2s/5s, while over the last 2-3m the dynamic has been relatively evenly split between bull steepening and bear flattening moves, the last couple of weeks have seen a more significant flattening bias (both bear and bull, 45% and 29%, respectively.We still see scope for a 2s/5s flattening bias near-term.

    • “A key pushback on the flattening view is based on a comparison vs the US. Many investors argue that the US case shows we could be pricing in much more rapid cuts for the ECB, creating a steepening potential for 2s5s and 2s10s… We caution against this reasoning and point to the fact that the return to neutral is in fact priced in faster in EUR, when observed from the date of the peak, to that of the trough in the OIS curve.

    • “We believe that for the 1y1y-1y EUR spread to converge towards the US one, we would need to price either a higher ECB terminal rate or a lower neutral rate (i.e., in both cases more room to cover to go back to neutral), or an earlier start to the ECB cutting cycle. Only the latter would drive the curve steeper relative to the forwards…

    • “The structure is short vega and short the market at inception. We target 50bp, with a stop at -25bp. The risk to the trade is an early rates rally, with pricing of more ECB cuts, with potentially unlimited downside. Because we are selling the low strike receiver, the position is also exposed to parallel bullish moves >55bp between 3m and 1y expiries.”


    New structured issues

  • NordLB issued EUR collared FRN due May 2028. Coupon pays 3mE capped at 4.5% and floored at 3%. Self-led.