USD Vol: 1m expiries jump to price in June FOMC

Prices chart 11 Oct 2021
;
1m expiries are substantially higher as they now include the June FOMC event. 1m1y traded at 40bps. Citigroup favors 1x2 receiver spreads.

Start a free trial to read this article

Join today to access all  Total Derivatives content and breaking news. Already a subscriber? Please Log In to continue reading.


Or contact our Sales Team to discuss subscription options.

Get in Touch
Blurred image of Total Derivatives article content

 

 

  • 1m expiries jump to price in June FOMC

  • 1x2 receiver spreads – Citigroup

  • New structured notes

     

    1m expiries jump to price in June FOMC

    Treasuries have bear steepened with yields anywhere from 1.3 to 6bps higher on the day. The vol surface is higher for 1m expiries, by virtue of pricing in the Jun 14th FOMC meeting. A source noted that 1m1y “was offered at 33.5bps on Friday and traded at 40bps today.” Thus, in annualized vol basis that translates to a roughly 28 annualized vol gain.

     

    While 1m expiries were up anywhere from 4 to 28 normals, the rest of the surface was uniformly lower. 3m expiries came down around 1 to 3 normals, 1y expiries were down around 1.5 to 4 normals while longer expiries were down around 0.5 to 1 normal.

     

    The debt ceiling remains a topic for sure, with the chance of default something people “are of course discussing” amid the “brinksmanship,” remarked one source - who thought that Biden would have to “give in.” Meanwhile regional banking health also continues to be a concern, though today PacWest shared are up around 12% after dropping more than 22% last week. “It is like a digital option” in regards to the regional banks, considered one trader.

     

    In interbank activity, 1m10y traded a high of 235bps and then dealt at 233bps and last at 229bps, 1y10y traded at 735bps, 1y20y dealt at 1096bps and then 1092.5bps, 1y1y traded at 130bps and then 129bps, 6m2y traded at 180bps, 1m30y traded at 414bps, and 6m10y dealt at 548bps and then down at 545bps, according to the SDR.  

     

    In longer expiries, 5y5y traded at 790bps and 10y10y dealt at 1560bps, according to the SDR. 

     

     

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

     

     

    1x2 receiver spreads – Citigroup

    Analysts at Citigroup find that “it is well known that the market has already priced in extreme easing based on the inversion of the front-end forward curve and the rich receiver skews” but they believe that “to really appreciate it, we have compared the market pricing for the next 2-3 months to the realized moves in the 2y and 10y in the months following the last rate hike since the late 70s.”

     

    “Since 1979, the average rally in 2s and 10s in the months immediately following the last hike has been well within the current market implied breakevens,” the bank finds. “Out of the 12 last hike observations, only the subsequent rallies in March 1980 and August 1984 have exceeded the current breakevens” while it notes that “March 1980 was clearly an outlier, where the Fed fund rate declined by 9.5%, and even the 2m changes in August 1984 were essentially in line with the current breakevens.”

     

    Thus, Citigroup concludes from this analysis that “while the mark-to-market volatility would certainly be high, the risk/reward for short-expiry 1x2 receiver spreads, especially on 2y rate, is clearly favorable.”

     

     

    New structured notes

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

     

    • BNP Paribas sold a $50m 20y NC5 zero-coupon callable (non-Formosa). The EMTN matures May 2043, is callable every five years starting May 2028. IRR 5.08%. Self-led. Announced May 12.

       

    • IBRD is working on a $20m fixed callable via Citi maturing May 2033 NC2 that pays 4.82%. EMTN. Announced May 9.

       

    • Goldman Sachs is working on a self-led fixed callable maturing May 2025 NC6m that pays 5.5%. Domestic MTN.

       

    • Goldman Sachs is working on a self-led fixed callable maturing May 2026 NC6m that pays 5.55%. Domestic MTN.

       

    • Goldman Sachs is working on a self-led fixed callable maturing May 2033 NC18m that pays 5.55%. Domestic MTN.

       

    • Goldman Sachs is working on a self-led fixed callable maturing Jul 2024 NC6m that pays 5.3%. Domestic MTN.

       

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

       

    • JP Morgan is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.05%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2025 NC6m that pays 5.1%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2027 NC6m that pays 5.15%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.25%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2026 NC6m that pays 5.1%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2033 NC1 that pays 5.58%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing May 2025 NC6m that pays 5.1%. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Jul 2024 NC6m that pays 5.05%. Domestic MTN.

       

    • Barclays is working on a self-led fixed callable maturing May 2027 NC6m that pays 5.15%. GMTN.

       

    • Citigroup is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.1%.  Domestic MTN.

       

    • UBS is working on a self-led fixed callable maturing May 2025 NC1 that pays 4.71%.  EMTN.

       

    • UBS is working on a self-led fixed callable maturing May 2024 NC6m that pays 4.78%.  EMTN.

       

    • UBS is working on a self-led fixed callable maturing Jul 2025 NC1 that pays 5.19%.  EMTN.

       

    • Toronto Dominion is working on a self-led USD extendible with initial maturity May 2024 and then extendible to May 2025 that pays 5.25%. Canadian.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing May 2033 NC2 that pays 5.5%. GMTN.

       

    • Bank of Montreal is working on a self-led fixed callable maturing Jun 2026 NC6m that pays 5.3%. Domestic MTN.

       

    • Standard Chartered is working on a self-led step-up callable maturing May 2026 NC1 that pays 3.25% to May 2024, 3.35% to Nov 2024, 3.45% to May 2025, 3.55% to Nov 2025 and 3.65% thereafter. Domestic MTN.