Belly vols lead a slight firming
Treasuries have sold off further as corporate deals from Merck ($6bn 6-part) and Apple ($5.25bn 5-part) launched. Swap rates are 5-7bps higher on the day and continue to come off the recent lows posted last week. The vol surface is a touch higher, with the belly leading the move. 3m expiries are anywhere from 1.5 to 3.5 normals higher on the day while 1y expiries are last around 0.5 to 2 normals firmer.
One source felt that vols look like that can come down further “unless there are big realizeds.” However, while the panic over regional banks seemed to reach an apex on Thursday before buyers of weak regionals swooped in on Friday, one source sounded caution over thinking that the market has seen the last of the regional banking issues and recalled that the higher realizeds and panic in the USTs markets last week was “driven by algos and where rates managed to move 10bps in a matter of minutes.”
Meanwhile, sources cite some speculation over what the possible mortgage hedging could come out of the JP Morgan’s purchase of First Republic and its jumbo mortgage portfolio, and one trader wondered “what do the mortgage portfolios (of First Republic) and the convexity actually look like?” And thus, this could be a source of vol buying in the future depending on the extent/nature of the hedging.
Interbank activity has been light today with 1y2y last at 243.5bps, 1y1y went through at 133.5bps and is now mid around 134bps or 2.2 normals higher on the day. 6m2y versus 1y1y traded as a switch at 184bps and 132bps, respectively, and some 1x2 ATM versus 200bp wide collar may have dealt.
Further to the right, 1m10y dealt at 239bps and then 240bps, 1y10y dealt this morning at 743.5bps but now is higher around 746bps mid, 1m20y traded at 345bps and 10y20y traded at 2448bps, according to the SDR.
Vols to drop in coming months – Citigroup
Going into the next FOMC meeting, vol analysts at Citigroup “believe that the base case for the June FOMC has shifted to a pause, with the hurdle for another 25bp hike being much higher” – though it notes that Citigroup’s economists are still expecting two more hikes of 25bp each in June and July.
Meanwhile, Citigroup makes the distinction that “a pause does not mean an imminent rate cut” as it notes Chair Powell had explicitly pushed back against, saying: “We on the committee have a view that inflation is going to come down not so quickly. It will take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates. We won't cut rates.”
Thus, the bank believes that “reasonable scenario for the coming months could be a Fed that remains on hold for longer than expected” and it points out that “because of the extremely aggressive easing that has already been priced into market expectation, the Fed can continue to passively tighten simply by staying on pause in the second half of the year.”
“If the banking stress remains contained and inflation continues to moderate at a slow pace, the Fed would be motivated to passively tighten by maintaining status quo, which most likely would dampen implied vol over the medium term,” Citigroup assesses.
Looking at the past tightening cycles since the late 1970s, Citigroup finds that indeed “rates vol tends to decline following the last rate hike.” With inflation “having seemingly peaked and moderating, albeit slowly,” Citigroup thus expects “the same bearish trend to play out across the entire swaption vol surface in the coming months.”
“One way to take advantage of the elevated upper-left vol while positioning for a longer than expected rate pause with limited downside risk is to own a 3m2y payer fly,” Citigroup proposes and thus specifically it favors buying $100m 3m2y ATMF payer versus selling $200m 3m2y A+25bp payer, and buying $100m 3m2y A+50bp payer.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Credit Agricole is working on a self-led $20m fixed callable maturing May 2033 NC2 that pays 5.3%. EMTN.
- IBRD is working on a $20m fixed callable via WFS maturing May 2033 NC2 that pays 4.65%. GMTN. Announced May 5.
- IBRD is working on a $20m fixed callable via Citi maturing May 2033 NC2 that pays 4.77%. GMTN. Announced May 8.
- CIC Financial Products is working on a self-led $30m fixed callable maturing May 2033 NC5 that pays 5.02%. EMTN.
- Morgan Stanley is working on a self-led step-up callable maturing May 2027 NC1 that pays 5% to May 2025, 5.25% to May 2026 and 5.5% thereafter. Domestic MTN.
- Goldman Sachs is working on a self-led CMS steepener maturing May 2028 NC1 that pays 5.75% for the first year, then pays 10*(CMS2y/10y), capped at 10% and floored at zero. EMTN.
- Goldman Sachs is working on a self-led fixed callable maturing May 2025 NC6m that pays 5.5%. Domestic MTN.
- CIBC is working on a self-led USD extendible with initial maturity May 2024 and then extendible to May 2025 that pays 5.05%. Domestic MTN.
- UBS is working on a self-led fixed callable maturing May 2025 NC1 that pays 5%. EMTN.
- UBS is working on a self-led fixed callable maturing May 2024 NC3m that pays 5.15%. EMTN.
- Wells Fargo is working on a self-led step-up callable maturing May 2030 NC2 that pays 5.15% to May 2026, 5.4% to May 2028 and 5.8% thereafter. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing May 2033 NC2 that pays 5.3%. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.15%. Domestic MTN.
- Wells Fargo is working on a self-led step-up callable maturing May 2026 NC1 that pays 5% to May 2024, 5.25% to May 2025 and 5.6% thereafter. Domestic MTN.