EUR Vol: Uptick in implieds; Next direction mulled

Chart lines
Euro implieds saw a small uptick today while dealers consider the next direction.

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  • Uptick in implieds; Next direction mulled 
  • Short vol through strangles - JP Morgan
  • New structured issues

    Uptick in implieds; Next direction mulled
    Euro yields continued to rise and the 10y Bund hit 2.50% (+2.5bps) for the first time since early March as global fixed income sold off, fuelled by stronger than expected UK CPI released first thing today.

    The euro vol surface saw an uptick of 0.5 to 1.5 normals across much of the grid, “The moves have been pretty negligible,” argued one euro vol trader. For instance, 3m10y bounced +0.7 to 104.2nvol and remains within the range of the past few sessions.

    Implied vols have seen a significant decline over the past few weeks and one dealer felt the market is mulling over the next direction, “We’ve come down a lot but we’re not really seeing much appetite for long vol positions at these levels and given the improving credit outlook,” he reckoned. "Asset managers typically hold more macro positions and overlay hedges, so are probably going to be looking at skew trades when it comes to re-balancing their exposures following recent moves.” 

    An exception to today’s uptick in implieds was the upper left corner where pieces such as 1m2y lost another 1 normal to 124.0nvol as the market nears its retracement following the SVB fallout.

    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.


    Short vol through strangles - JP Morgan
    Strategists at JP Morgan continue to hold selectively short volatility trades via selling Jun23 unhedged strangle (96.125/96.75). The bank explains:

    • “The breakeven ranges for this trade with Jun23 Euribor between (3.07%, 4.05%) continues to offer good protection across our ECB scenarios over the next 8 weeks. Implieds have overall declined around 1.5bp/day over the past two weeks while yields remain in a tight range We expect front-end yields to remain in a narrow range and implieds decline further. Stay short unhedged Jun23 strangle.

    • “Additionally, call and put skew appears to be expensive. With the ECB still to deliver at least another 25bp in May with a total hike of around 50bp to 75bp by summer (a total of 75bp in our baseline view), we assign a negligible probability of the Jun23 Euribor futures breaching the lower breakeven (around 3%).


    • "On the other hand, implieds are likely to decline even if the ECB continues to hike above 3.5% as the distribution of the terminal rate will likely shrink further as depo rates move higher. Thus, we stay short unhedged strangle, which also benefits from decent empirical mean reversion of yields.”


    New structured issues

  • NordLB issued EUR 15y NC5 callable due May 2038. Coupon pays 5.0% with annual calls from May 2028. Self-led.


  • Erste Bank issued €8.5m CMS-linked MTN due Apr 2033. Coupon pays 1.3 * EUR 10y, capped at 5.5% and floored at 2%. Further details unavailable. Self-led.