USD Vol: Gamma drops, but realizeds support; 2x3 collars

Gamma drops, but realizeds support; 2x3 collars

Treasuries have sold off double digits in the front end with the 2y note yield 15bps higher on the day while the long end is off 5bps. The selloff is at odds with the mostly weaker economic data released today, sources note. Although the equity market is in positive territory after more good earnings out of the tech sector, some sources were skeptical that it justified the UST selloff.

The vol surface is lower on the day, but is now off the earlier lows as the realized move increased further this afternoon, sources say. “Offers are moving away a little,” remarked one source as the double-digit realizeds have had some impact. Still 3m expiries are softer by around 1.25 to 5.5 normals while 1y expiries are roughly down 2 to 5 normals on the day.

In market activity, 2x3 collars were active today with the 100bp each way collar going through at 8.5bps, the 125bp each way collar dealing at 10bps and the 150bp each way collar going through at 11.5bps, sources say. One trader noted that the caps are trading at a premium, likely because the ATM forward is “low” at around 2.855% with the many implied Fed cuts priced in.  

Also, 0% floors have seen some business recently. For example, amid the rise in vol earlier this week, a trader highlighted that the 3y 0% floors saw a very strong bid in prior days this week with it trading up at 26bps and 27bps (the market leading into those lifts was 17/22bps). Since then the market is now back to around 18bps, the source noted. Meanwhile, today some 3x5 0% floors dealt at 23bps, with the offer lifted.

In other interbank activity, 3m30y traded at 694bps, 690bps, 677bps and last at 673bps, 4y2y dealt at 359bps and 357bps, 1y5y traded at 467.5bps and 4y5y traded at 788bps. Earlier, 1y1y dealt at 129bps but now is better bid into the close at 130bps/131bps. A source pointed out that pieces like 1yy and 2y1y have been "seeing bids how up" into the closing hours recently.

In switches, 6m20y versus 6m3y traded at 793bps and 259bps, respectively, 15y20y versus 15y5y dealt at 2760bps and 1001bps, respectively, and 5y30y versus 5y10y traded at 2660bps and 1376bps, according sources and the SDR. Earlier, 3m10y versus 3m30y traded at a spread of 309.5bps and then 304.5bps, according to the SDR.

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

Citigroup – bearish vol, but hedge with cheap equity options

Analysts at Citigroup point out that “the pullback in volatility over the past month has occurred not in isolation in rates, but rather it has been pervasive across nearly all asset classes” which is not surprising given the underlying macro drivers for the lower vol – such as “abating concerns for the banking sector and moderating inflation data.”

However, “while the cheapening in rates vol has been undoubtedly significant, it does not seem outsized when viewed in comparison to the declines in FX and risky asset implied vols” and indeed, implied rates vol “remains to be the highest on a z-score measure while implied equity vol looks to be the lowest, having retraced to its late 2021 level,” Citigroup highlights. 

Further Citigroup points out that “risky assets (HY credit and equities) have been tracking implied rates vols relatively closely since the start of the current hiking cycle.” As a result, the bank suggests that as long as the current relationship holds, “investors can take advantage of the relatively low equities vol to hedge against their rates vol exposure.”

Given its near-term neutral duration view and expectation for the immediate upcoming economic data to be mixed and keep rates range-bound, Citigroup remains bearish on rates vol, especially on the right-side. Thus, Citigroup favors a “cross asset opportunity to be short rates vol on the 10y tails to earn carry in the near-term (next 2-3 months) and hedge the position for a risky asset sell-off scenario by owning relatively cheap downside options.”

New structured notes

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

• IBRD sold a $50m 15y NC3 fixed callable. The EMTN matures May 2038, is callable annually once in May 2025, and pays a 4.85% coupon. The note is led by Nomura and was announced Apr 26.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2026 NC6m that pays 5.4%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2025 NC6m that pays 5.35%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2033 NC18m that pays 5.5%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.6%. Domestic MTN.

   

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

   

• Bank of America is working on a self-led step-up callable maturing May 2030 NC1 that pays 5.1% to May 2025, 5.5% to May 2028 and 6% thereafter. Domestic MTN.   

   

• Citigroup is working on a self-led fixed callable maturing May 2028 NC1 that pays 4.8%. EMTN.

   

• Toronto Dominion is working on a self-led USD extendible with initial maturity May 2024 and then extendible to May 2025 that pays 5.3%. Domestic MTN.

   

• Toronto Dominion is working on a fixed callable via TD and BofA maturing May 2027 NC6m that pays 5.4%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing May 2030 NC2 that pays 5.25%. GMTN.

   

• Bank of Montreal is working on a self-led USD extendible with initial maturity Nov 2023 and then extendible to May 2025 that pays 5.35% to May 2024 and 5.45% thereafter. Domestic MTN.

   

• Bank of Montreal is working on a self-led CAD extendible with initial maturity May 2024 and then extendible to May 2030 that pays 4.92%. Canadian.