EUR Vol: Pop higher as credit fears return

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Euro implieds popped higher today as credit fears returned

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  • Pop higher as credit fears return
  • Hold 2y10y OTM payers - JP Morgan
  • New structured issues

    Pop higher as credit fears return
    Euro implieds popped higher today as credit fears returned after the US bank First Republic said deposits had fallen by 40% through Q1 2023 while its shares lost over 25%. “The First Republic headlines have rattled people a bit,” said one euro dealer earlier.

    Similar to the March credit crisis, the upper left corner has led the move higher with gains of around 10 to 11.5 normals. For instance, 3m2y was +11.7 at 132.9 and 1y1y +10.5 at 128.1.

    “The bids we were seeing the last few sessions seemed to be on the back of US banking results and a sense that a few skeletons could yet emerge,” said one euro vol trader.

    In the underlying, red Euribors rallied up to 10bps while red SOFR futures surged as much as 20bps earlier. Elsewhere, credit concerns were reflected in swap spreads with the Schatz ASW widening up to 5bps at 80bps and testing the early April highs.

    Elsewhere, the right-hand side also posted gains, but the move was less dramatic with 3m10y +4.7 at 105.7. In the underlying, global fixed income has rallied with the 10y future up more than a point while the 10y Bund yield declined by -12.5bps to 2.38%.


    Ahead, one trader reckoned it was "not panic stations just yet" and felt the latest gains reflected "sensible gains" for the vol market. "I wouldn't say there's any real concerns," he reckoned. 

    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.


    Hold 2y10y OTM payers - JP Morgan
    In its latest rates weekly JP Morgan outlines why it favours holding 2y10y OTM payers. It writes:


    • “We had rotated our short volatility exposure in the intermediate sector from 3m10y OTM payers into 2y10y OTM payers and continue to hold it… an expected slow-down from global central banks and then pause in the hiking cycle should be supportive of short volatility positions.

    • “Moreover, the scope of any significant central bank surprise remains rather limited, in our view, and should warrant lower risk premium. 2y10y implieds are broadly unchanged over the week but remain elevated from a fundamental perspective.

    • “Risk to our view could come from deterioration of the US debt ceiling debate and remain wary of rise in implieds in a significant rally and therefore prefer to express our short volatility view via OTM payers.”


    New structured issues

  • SPIRE issued €40m 16y NC4 callable repack due Jun 2039. Coupon pays 4.12% with single call in Jun 2027. Backed by unspecified repack. Led by UBS.

  • DZ Bank issued EUR 3y NC1 callable due May 2026. Coupon pays 4.05% with single call in May 2024. Self-led.