EUR Vol: Top left rebound extends; Structures

Grid surface volatility 30 Jan 2023
The top left of the euro vol grid edged higher and continued to rebound from recent lows.

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  • Top left rebound extends
  • Top left receivers - Barclays
  • New structured issues

    Top left rebound extends
    Euro implieds were mixed today amid an uneventful start to the week. The 10y Bund future traded a 79 tick range and finished the session around 10 ticks lower while the 10y yield was marked at 2.50% (+2.5bps).

    In euro vol the upper left corner outperformed other parts of the grid and continued a rebound that emerged during the second half of last week. For instance, 1y1y moved up by 0.8 to 117.6 today and has gained around 5.5 normals over the past four sessions.

    “It’s still a bit rich compared to the rest of the grid but that seems justified,” said one trader, “I wouldn’t say credit concerns are back, but equities have lagged a bit recently and the backdrop has been a bit risk-off,” he added.

    Elsewhere, the top right edged slightly lower with 3m10y down -1.7 at 101.0 and moving below recent lows although still above the 2023 lows hit in late January around 96nvol.

    In terms of flows, one trader said it had been “pretty uneventful” but agreed interest could pickup ahead of the Euro HICP prints due the end of this week from France, Germany and Spain.

    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.

    Top left receivers - Barclays
    Strategists at Barclays recommend taking advantage of top left receiver skew via buying 1y1y 1X2 low-strike receiver spreads at ATM-50 vs ATM-100 for around 3 cents. It writes:


    • “The buying of downside protection since the March banking concerns has richened EUR top-left receivers to historical highs… the current level of ATM+50bp vs. ATM-50 skew in 1y1 is the lowest of any point in the past decade. While the current skew level is in line with the rates-vol dynamic, in previous episodes when the 1yf 1y rate-vol beta turned negative, the implied skew was much higher amid considerably lower realized skew.

    • We recommend buying 1y1y 1X2 low-strike receiver spreads struck at ATM-50 vs ATM-100 to take advantage of the negative skew and position for a gradual move lower in rates in the medium term…

    • “The structure is constructed with low strikes in order to reduce its duration exposure at initiation. The trade has long skew exposure to benefit from rich low strike volatility, and also has a short vol exposure. As the policy rate reaches terminal levels and the ECB pauses, the trade could benefit from volatility gradually grinding lower.”


    New structured issues

  • Citigroup issued €10m 23y NC15 callable due Apr 2046. Coupon pays 4.54% with single call in Apr 2038. Self-led.

  • KfW issued €25m 10y NC1 callable due May 2033. Coupon pays 4.11% with calls in May 2024 and May 2026. Led by BNP Paribas.

  • KfW issued €20m 9y NC1 callable due May 2032. Coupon pays 4.0% with single call in May 2024. Led by LBBW.

  • Credit Agricole issued €50m 10y NC4 callable due Jul 2033. Coupon pays 4.75% with annual calls from Jul 2027.

  • Credit Agricole issued €20m CMS-linked Green EMTN due May 2035. Coupon pays EUR 20y +103bps capped at 5% and floored at 3%. Self-led.