USD Vol: ULC pops early on, recedes; More vega trades

ULC pops early on, recedes; More vega trades

Treasuries have come well off the earlier highs seen post PPI, with the front end close to unchanged after seeing yields down nearly 10bps early on. The curve has shifted from bull steepening to bull flattening with the long end bid helped on by today’s nearly 2bps through $21bn 30y auction result.

The vol surface saw the ULC jump higher this morning but is now off the earlier highs. The right side is also off the earlier highs in a more moderate move while vega points have remained a bit lower. 3m expiries are around 1 to 6.5 normals higher, led by the 1y tail, after seeing 3m1y gain as much as 8.5bps, with trading at 71bps and the 73bps (with the offer lifted) but is now back down trading last at 70bps, sources say. 

Further along the expiry curve, 1y expiries are last +/- a normal, with the left side underperforming the right. 1y1y dealt at 137.5bps versus 1y10y at 760bps in a switch this morning, and then 1y1y dealt at 135bps and 136bps outright later for a blended ticket at 135.5bps, sources say. Meanwhile, 1y10y traded up at 764bps, according to the SDR, and then 761bps (possibly versus 1y5y at 486bps), with the screens now showing a mid of 759bps – a level one trader suggested seems a bit on the high side, as 2y10y market was last 995/1003bps.

Overall, a trader felt that the price action in recent days seems to indicate a measure of "fear" lurking in the vol markets, with bid in the ULC quick to go up on any whiff of an underlying rally. However, realized volatility has not been keeping up to the breakevens in the ULC, the source highlighted. Thus, though people “are paying up” – they are at the same time swallowing quite of theta as “the rolldown is pretty crappy,” the source remarked. 

In other interbank activity today, 2y1y traded at 158bps, 1y5y dealt at 484bps. In longer expiries, 5y10y versus 5y5y traded as a switch at 1355bps and 809bps, respectively. Also, 10y10y dealt in good size at 1575bps - which one source reckoned might be vega hedging related. Elsewhere, a switch of 7y20y versus 1y20y dealt at 2255bps and 1146bps, respectively.

In skew, a 1y10y 100bp each way risk reversal dealt at +17bps around midday, according to the SDR. In the ULC, a 2m2y ATM  versus 50bps low receiver traded at 54.5bps versus 25bps.

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

Long duration option plays; Top left payer buys – Barclays  

Analysts at Barclays examine key themes from USD swaption SDR seen over the past couple of weeks, ending May 5th. First, the bank finds that “directional sentiment in swaptions is tilted long duration overall” as it sees “an increase in the relative frequency of receiver-based swaption structures.” For example, “3y10y receiver spread struck at 2.75% vs 1.25% targeting lower long-term rates, to a 1y1y receiver spread struck ATM vs ATM-90 initiated after the FOMC meeting for a more benign policy path,” Barclays points out. “In the past, this has tended to be an indicator of bullish duration sentiment,” it notes.

Secondly, Barclays suggests that swaption market participants “are neutral on volatility with volumes near annual lows.” To be sure, the bank highlights that “gross vega volumes in the swaption market were at an annual low ahead of central bank meetings and payroll data” while the net direction of vol flows “was neutral.” However, the bank adds that systematic short gamma flow as estimated from 1m10y straddle volume “has been slowly picking up from its March trough (because of banking concerns) now that calmer market conditions prevail.”

Lastly, Barclays finds that investors are “buying top left payers, possibly because of a vol supply overhang.” Indeed, Barclays points out that most of the payer-based structures that have been reported are “in the top left, such as high strike 1y1y payers struck around 4.75% to 5%, potentially trying to position for protection against a bearish shift in rates.”

New structured notes

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

• IBRD is working on a $50m fixed callable via ML maturing May 2043 NC4 that pays 4.67%. EMTN.  Announced May 11.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing May 2030 NC6 that pays 4.91%. GMTN. 

   

• KfW is working on a $50m fixed callable via RBC maturing May 2026 NC6m that pays 5.11%. EMTN.  Announced May 10.

   

• Citigroup sold a $135m 5y floating Formosa. The EMTN matures May 2028, is not callable and pays O/N SOFR +1.2%. Leads CTBC, Mega, Sinopac and Taishin and announced May 10.

   

• Morgan Stanley is working on a self-led $20m CMS dual ranger maturing May 2046 NC1 that pays 4.1% for the first two years, then pays 5.3% as long as CMS10y is less than or equal to 4.5% and CMS5y/30y is greater than or equal to zero thereafter. Credit-linked to a Korean international bond. EMTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2028 NC6m that pays 6%. Domestic MTN.

   

• Goldman Sachs is working on a self-led fixed callable maturing May 2033 NC1 that pays 6%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing May 2025 NC1 that pays 4.7%. EMTN.

   

• HSBC is working on a self-led step-up callable maturing Nov 2024 NC6m that pays 4.2% to Nov 2023, 4.25% to May 2024 and 4.3% thereafter. Eurodollar.

   

• UBS is working on a self-led $10m fixed callable maturing May 2024 NC3m that pays 5.15%. EMTN.

   

• UBS is working on a self-led CMS range accrual maturing May 2024 NC1m that pays 7.43% as long as CMS1y is between 3.3-5%. EMTN.  

   

• UBS is working on a self-led CMS range accrual maturing Feb 2024 NC1m that pays 6.32% as long as CMS1y is between 3.3-5%. EMTN.  

   

• UBS is working on a self-led CMS range accrual maturing Nov 2024 NC1 that pays 7.5% as long as CMS1y is between 3.3-5%. EMTN.  

   

• Toronto Dominion is working on a self-led $825m fixed callable maturing May 2024 NC9m that pays 5.4%. CD format. Domestic.

   

• Royal Bank of Canada is working on a self-led $40m fixed callable maturing May 2033 NC4 that pays 5.09%. Putable Aug 2023. EMTN.  

   

• Royal Bank of Canada is working on a self-led fixed callable maturing May 2028 NC3 that  pays 4.93%. EMTN.

   

• Bank of Montreal is working on a self-led USD extendible with initial maturity May 2024 and then extendible to May 2025 that pays 5%. Domestic MTN.

   

• Bank of Montreal is working on a self-led CAD extendible with initial maturity May 2024 and then extendible to May 2025 that pays 4.87%. Canadian.

   

• African Development Bank is working on a $50m fixed callable via CACIB maturing May 2026 NC1 that pays 4.79%. GMTN.