Left to right move; ULC softens vs. slight bid on right
Treasuries are lower, but off the lows of the day, with swap rates 0.5 to 2bps higher on the day after the $40bn 3y auction was very strong - coming 3bp through the 1pm bid side with record indirects (73.3%) and a record low primary dealer allocation (13%) .
The vol surface is seeing a left to right move today with the left side underperforming lower versus the right side edging lightly higher on the day. For example, 6m expiries have been active today in the interbank and are anywhere from -1.5 normals on the left side to up a normal on the right side. Although realizeds are lower today, the debt ceiling issue appears to be coming to a head along CPI tomorrow - and thus vols are hovering - with the right seeing a bit of an uptick this afternoon from the morning levels.
Interbank activity today has included 1y1y at 134bps, 6m2y at 186bps, 6m1y versus 3m1y at 96.5bps and 68.5bps, respectively. Further to the right, 1y5y versus 2y5y traded at 478bps and 615bps, respectively, 6m10y dealt outright at 561bps, and also dealt as a switch versus 6m20y at 561bps and 838bps, respectively, and versus 6m30y at 560.5bps versus 1041bps, respectively, according to the SDR.
Longer tails also saw some business, with 1y30y trading at 1410bps, 6m30y at 1046bps, and 7y20y trading outright at 2260bps, and also as a switch versus 1y20y at 2265bps and 1130bps, respectively, according to the SDR.
In skew, a 1y5y 100bp each way risk reversal traded at -2.5bps while late yesterday a 3y1y 100bp each way risk reversal traded at +9.5bps, according to the SDR.
BNP Paribas – Vol to fall for balance of 2023
Analysts at BNP Paribas recently investigated the behavior of US rate volatility in easing cycles beginning in 1974 and the bank finds that “patterns witnessed in the three most recent cycles are somewhat distinct to what was seen in prior Fed easing campaigns.”
Indeed, BNP Paribas highlights “unlike the prior cycles this century, volatility has remained elevated through the recent tightening cycle, while our baseline for the Fed is that cuts will take the policy rate to near neutral, rather than back to the ZLB.”
Meanwhile, along with updating its swaption vol regression model, BNP Paribas introduces a longer-term framework to analyze 3m realized volatility on the 2y and 10y UST and from these, the bank’s findings “suggest that both implied and realized volatility are elevated, particularly on shorter tenors.” For example, the bank’s regression model “currently finds more Fed-sensitive points (such as 1y2y) trading above fair value, while implied vol on longer tenors such as 1y10y are close to fair value. ‘
Overall, the bank’s scenario analysis “suggests that vol should fall for the balance of 2023, and that the start of easing needn’t drive vol higher, unless an economic hard landing becomes very likely.” With this backdrop, BNP Paribas favors selling 18m2y ATMF straddles while rebalancing delta daily.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- AFDB sold a $50m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2053, is callable annually from May 2028 and has an estimated IRR of 4.78%. Lead is JPM and announced May 9.
- Credit Agricole sold a $30m 10y NC3 fixed callable. The EMTN matures May 2033, is callable annually from May 2026 and pays a 5.26% coupon. Self-led and announced May 9.
- IBRD is working on a $20m fixed callable via Citi maturing May 2033 NC2 that pays 4.82%. EMTN. Announced May 9.
- IBRD is working on a $20m fixed callable via CACIB maturing May 2033 NC1 that pays 5.3%. EMTN. Announced May 9.
- Standard Chartered is working on a self-led fixed callable maturing May 2028 NC2 that pays 5%. EMTN.
- Verizon Communications is working on a fixed callable via InspereX maturing May 2030 NC1 that pays 4.7%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2053 NC6m that pays 5.75%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2028 NC6m that pays 4.5%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2033 NC6m that pays 5.05%. Domestic MTN.
- Ally Financial is working on a fixed callable via InspereX maturing May 2033 NC6m that pays 7.2%. Domestic MTN.
- Ally Financial is working on a fixed callable via InspereX maturing May 2026 NC6m that pays 6.7%. Domestic MTN.