USD Vol: Gamma ticks down while 1y expiries see slight bid

Gamma ticks down while 1y expiries see slight bid   

Treasury yields has seen a relatively tight range and low realized volatility today, with swap rates around unchanged in the front end to down 2bps in the 10y. The vol surface is seeing a modest downtick of around 0.25 to 0.75 normal in 3m and 6m expiries while intermediate 1y expiries have moved slightly higher on the day, led by the left side with gains of 1 to 2.5 normals, while the right side is near unchanged on the day.

After the main events of NFP and CPI were digested in the past couple of weeks, vols have been mostly on the decline and sources say that with May FOMC seeing a consensus of 25bps hike, some of the immediate uncertainty has been curtailed. That said, even though it is off the extremes, the +100bps of easing in the front end into early next year has continued to be highlighted by several sources as looking too aggressive.

Thus, some of the premium for vols in the upper left seem justified for the potential repricing of those forwards, sources say. Meanwhile, the receiver skew remains at a premium to payers in the extreme upper left, with for example, 6m1y 100bp each way risk reversal dealing today at -8.75bps, according to the SDR. The same risk reversal traded a week ago at -9bps, according to the SDR. Elsewhere, a 100bp high payer traded in 6m1y today versus ATM at 7.5bps versus 43bps for the ATM.

Meanwhile, longer expiries on longer tails have been deeply payers over, with for example, 4y10y 150bp each way risk reversal going through today at +83bps, according to the SDR.

In other interbank activity, starting in the ULC, 6m2y traded at 165bps, 1y2y traded at 220bps, a switch of 1y1y versus 1y2y dealt several times at 101bps and 101.5bps spread, a fly of 1y2y/1y3y/1y5y dealt at 222bps, 311bps and 451bps, respectively, 3m1y traded at 60bps and early this morning, 6m1y traded at 166bps and 1y1y at 119.5bps, according to the SDR.

In intermediate and longer tails, 3m5y traded at 244bps, 3y5y dealt at 683bps and then up at 684bps, 1m10y dealt at 222bps and 3m10y traded at 376bps and then up at 378bps, and 1y10y traded at 734bps, according to the SDR. In longer expiries, 3y10y dealt early at 1140bps and a switch of 3y5y versus 10y10y may have dealt at 683bps and 1582bps, respectively.   

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

Seismic front end shifts will correct – Deutsche  

Analysts at Deutsche find that “in terms of reshaping the front end of the curve, the second week of March represents a turning point in the market’s perception of monetary policy and a structural shift in repricing economic uncertainties” and “in terms of its intensity and magnitude, repricing during those ten days dwarfs anything we have seen in the recent (and not so recent) past.”

Further, Deutsche assesses that “this reshaping of the curve is consistent with the pricing of the options market, which reflects the shrinking of the uncertainty horizon after the past month's events” as it notes “before 7 March the market was pricing in a gradual taper of rate cuts, with peak uncertainty attached to the terminal Fed more than 12 months into the future” but  “by 17 March – only ten days after the first news about the banking crisis hit the market – the idea of monetary policy reversal became the main short-term risk.”

“As a consequence, the uncertainty horizon shrunk with the peak of the vol surface, which used to reside around intermediate short tenors, migrating towards the very edge of the upper left corner” and  “this resulted in huge swings in calendars there with 1y1y – 6m1y vol spread compression from +12bp to -47bp in only ten calendar days,” Deutsche highlights. Indeed, the bank points out that “this magnitude of calendar repricing dwarfs anything we have seen before, including the 25bp calendar compression in October 2008 when immediate Fed action had the highest urgency and, at the same time, the highest uncertainty in recorded history.”

“While there are reasons that warrant the recent reshaping of the vol manifold, the outsized reaction of calendars to moderately dramatic buildup of risk, in our opinion, is largely a function of positioning, liquidity, and changing risk management practices together with market players' reduced willingness to bear risk,” Deutsche argues.  As a result, the bank believes “the current level ordering is not stable and is likely to correct” and “presents itself as an RV opportunity.”

Given the current shape of volatility surface and the yield curve, Deutsche finds that “conditional bear steepeners in the money market sector are an attractive way to take advantage of the present market impasse” and specifically the bank favors buying $1bn 6m 1y1y ATMF MC payers vs. selling $1bn 6m1y ATMF payer.

“The trade could be seen as a positive carry hedge against a possible rebound in inflation and additional Fed hikes,” Deutsche explains and “it would benefit from additional (currently unexpected) Fed hikes or persistent Fed hawkishness, beyond what is priced in.”

New structured notes

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

• National Bank of Canada is working on a $9m fixed callable via KGI maturing Apr 2028 NC4 that pays 4.95%. EMTN.

   

• National Bank of Canada is working on a $9m fixed callable via KGI maturing Apr 2028 NC3 that pays 5.15%. EMTN.

   

• JP Morgan is working on a self-led $25m floating callable maturing Apr 2030 NC2 that pays O/N SOFR +100bps. EMTN.  

   

• JP Morgan is working on a self-led fixed callable maturing Apr 2026 NC6m that pays 5.2%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Apr 2028 NC2 that pays 5.15%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 5.2%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Apr 2025 NC6m that pays 5.25%. Domestic MTN.

   

• Barclays is working on a self-led $250m floating callable maturing Oct 2023 that pays O/N SOFR +22bps, callable and puttable Sep 2023. Private placement.

   

• ING Bank is working on a $30m fixed callable maturing Apr 2028 NC1 that pays 5.33%. Lead N/A.  EMTN.  

   

• Credit Agricole is working on a self-led $50m fixed callable maturing May 2033 NC2 that pays 5.45%. EMTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Apr 2028 NC3m that pays 5.25%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Apr 2025 NC1 that pays 5.25%. GMTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Apr 2026 NC6m that pays 5.5%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Apr 2028 NC6m that pays 4.8%. CD format. Domestic.