USD Vol: Gamma lifts with higher rates; 6m1y risk reversals

Gamma lifts with higher rates; 6m1y risk reversals    

Treasuries slid lower today as global inflation worries persisted in the form of higher UK inflation (see Total Derivatives). Swap rates are 1.5 to 6.5bps higher on the day, led by the front end. The vol surface is ticking up higher, with the directionality continuing to flip this week, as higher rates have been met with higher vol.

Today’s move has been largest gains in gamma for the week, with 3m expiries anywhere from 2 to 4 normals higher on the day, led by short tails. 1y expiries are also firmer, with gains of 1.5 to 4 normals while longer expiries have continued to be close to unchanged to a 0.3 normal higher on the day.

The new directionality in vols has been counter to short dated upper left skew, and the rise in vol this week appears to be a function of short covering/profit taking from the lows posted last week, sources judge. Meanwhile the short dated skew in the upper left remains receivers over. 6m1y 100bps each way risk reversals traded today at -8.5bps and then at -8bps, and trader pointed out “-8bps is still fairly low levels” and “receivers are decently over.”

In other OTM activity, sources note a 10y20y 400bps wide strangle versus straddle traded today at 609bps versus 2450bps with strikes on the strangle at 0.95% and 4.95%. Elsewhere, a 1y30y 100bp each way risk reversal dealt at +28bps, after trading a week ago at +25bps, according to the SDR.

In ATM interbank activity thus far, 1m5y traded at 144.5bps, then 145bps and 147bps, 1day5y dealt at 40bps, 3y5y traded at 683bps, 1y2y traded at 223bps, 2y10y traded at 985bps and then 986bps, 2y30y traded at 1849bps, 1m10y traded at 225bps, and 6m10y traded at 538bps and then down at 537bps, according to the SDR.

In switches, a 1y25y versus 2y25y traded at 1236bps and 1672bps, respectively, 6m1y versus 18m1y dealt at 84bps and 139.25bps, respectively, and 1m10y versus 1m30y traded at 219.5bps and 382bps, respectively, according to SDR.  

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

Seasonal, lower realizeds drivers; Short Blue/Golds convexity adjustments - Citigroup

Analysts at Citigroup view the recent vol cheapening “consistent with the strong negative April seasonal pattern.” To be sure, the bank finds that the drop in vol from the recent highs has “also partly driven by the collapse in recent realized vol and the strong negative April seasonal pattern.”

For example, Citigroup points out in the past 19 years, “3m10y swaption vol has declined 15 times and only increased meaningful twice in 2009 and 2022” in April and “since 2005, the average monthly change in 3m10y swaption vol in April has been -5.3 normals, and the change so far this April has been -9 normals,” with some of the seasonality likely due to the Easter holiday which general is in April and “market participants could be less active in general as a result.”

But despite the decline in implied vols, Citigroup finds that the Blues and Golds convexity adjustments “have remained elevated outright” and also relative to its model as the bank finds that the Blues and Golds convexity adjustments “appear to be about 6.5bps and 9.5bps too high respectively” relative to its model.

Overall, Citigroup judges that the dislocation between the convexity adjustments and the model fair values “is not justified and has scope to normalize” and thus it believes that “shorting the convexity adjustments is a better way to monetize the elevated implied vols than selling rates options.”

New structured notes

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

• Standard Chartered is working on a self-led $31m fixed callable maturing Apr 2028 NC2 that pays 5.35%. EMTN.

   

• Citigroup is working on a self-led fixed callable maturing Apr 2028 NC1 that pays 5%. EMTN.

   

• Credit Agricole sold a $50m 10y NC2 fixed callable Formosa. The EMTN matures May 2033 and is callable May 2025 and annually thereafter and pays 5.45%. Self-led. Announced Apr 17.

   

• Bank of Nova Scotia sold a $15m 10y NC4 floating callable Formosa. The EMTN matures May 2033 and is callable May 2027 and annually thereafter and pays 2y SOFR +1.6 %. Lead KGI. Announced Apr 17.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2033 NC1 that pays 5.65%. Domestic MTN.   

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2027 NC1 that pays 5.5%. Domestic MTN.   

   

• Goldman Sachs is working on a self-led fixed callable maturing Jun 2024 NC6m that pays 5.35%. Domestic MTN.   

   

• Goldman Sachs is working on a self-led step-up callable maturing Apr 2030 NC1 that pays 5.375% to Apr 2025, 5.75% to Apr 2028, 6% to Apr 2029 and 7% thereafter. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing Apr 2036 NC1 that pays 5.35%. Domestic MTN.   

   

• Goldman Sachs is working on a self-led fixed callable maturing Apr 2025 NC6m that pays 5.3%. Domestic MTN.   

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2024 NC6m that pays 5.25%. Domestic MTN.   

   

• UBS is working on a self-led fixed callable maturing Jul 2024 NC1m that pays 6.28%. EMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Apr 2026 NC6m that pays 5.75%. GMTN.

   

• Royal Bank of Canada sold a $15m 15y NC6 zero coupon callable (non-Formosa). The EMTN matures Apr 2038 and is callable annually starting Apr 2029. Self-led. Estimated IRR 5.7%. Announced Apr 19.

   

• Bank of Montreal is working on a self-led fixed callable maturing Apr 2025 NC6m that pays 5.4%. Domestic MTN.

   

• Wells Fargo is working on a self-led step-up callable maturing Apr 2026 NC1 that pays 5.1% to Apr 2024, 5.3% to Apr 2025 and 5.7% thereafter. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing Apr 2028 NC18m that pays 5.15%. Domestic MTN.

   

• Bank of Nova Scotia is working on a self-led fixed callable maturing Apr 2030 NC5 that pays 5%. Putable Oct 2023. EMTN.

   

• Bank of Nova Scotia is working on a self-led fixed callable maturing Apr 2030 NC6 that pays 4.92%. Putable Oct 2023. EMTN.

   

• Bank of Nova Scotia is working on a self-led fixed callable maturing Apr 2028 NC3 that pays 5.05%. Putable Oct 2023. EMTN.

   

• Bank of Nova Scotia is working on a $50m fixed callable via Nomura maturing Apr 2028 NC2 that pays 5.35%. Putable Oct 2023. EMTN.