Left to right move; Realizeds drop
Treasuries 3.7 to 7bps higher in yield today in a bear flattening. The mammoth $31bn Pfizer jumbo 8-part launched this afternoon– the fourth largest corporate jumbo ever, sources say - with selling USTs along with the deal as portfolio managers make room for the supply.
The vol surface is seeing a left to right move with the left side falling in lower versus a firming in longer tails in gamma points. 3m expiries are -0.5 to -1.25 normals lower in 1y and 2y tails while 3y tails are near unchanged. Further to the right 5y to 30y tails are anywhere from around 1-2.5 normals higher, led by the 30y.
A similar story is playing out in 6m expiries while 1y expiries are more uniformly higher by 0.75 to 1.3 normals. Meanwhile vega is ticking up slightly by 0.25 to 0.5 normal.
Realized volatility has been dropping and are under the implied breakevens, especially for the left corner, with 1m2y currently implying around 11.7bp/day and 1y1y last at around 10.2bp/day breakeven. Thus, "if you get a couple of quiet sessions of lower realized volatility, you’ll start to see the ULC come in typically," noted a source. That said, vols have been fairly “reactive” in the past couple of weeks, and it hasn’t taken that much for vols to go back bid, despite the already high levels, a source noted.
Interbank activity today, 3m1y dealt at 64.5bps, 6m3y traded at 250bps, 1y1y traded at 128bps and then 127bps and last at 126.5bps. Further right. 1m10y traded at 237bps, 6m10y dealt at 551bps and 555bps, 1y10y traded at 738bps and 10y10y traded at 1554bps and then 1556bps, according to the SDR.
In skew, 6m30y 50bp each way risk reversal dealt at -11bps and -9bps, according to the SDR.
Tendency for 2y tails to lag 10y post-pause - Citigroup
While the overall bearish vol bias after the last hike is clear, analysts at Citigroup find that “the relative performance between left-side and right-side vols after the last hike is less certain.” Looking back at the late 70s/early 80s, Citigroup sees that: “(1) the current implied vol ratio of 150% for 2y tails vs 10y tails is appropriate in this context, (2) the realized vol ratio of 2y Tsy to 10y Tsy never fell below 110% until after 4Q1982, when the Fed was already fully entrenched in an easing cycle, and (3) the vol on the 2y did not always immediately underperform relative to the vol on the 10y at the onset of a Fed pause.”
However, Citigroup notes “over time it does appear that there is a tendency for the 2y tails to underperform 10y tails after the pause.”
The bank finds that the more recent cycles “paint a similar picture, where there is no clear relative performance bias in the first month after the last hike, but 2y tails have underperformed 10y tails more often than not over time” Indeed, Citigroup points out one “can certainly see a repeat of the same behavior this time with the ongoing bank stress supporting left-side vol in the near term.”
As Citigroup has previously noted, “vol on front-end rates tend to stay elevated (likely up to 3 months) after extreme front-end repricing like the ones we experienced in March” and this is consistent with the bank’s view that “it is still too early to expect a meaningful cheapening in left-side vol relative to right side.” However, Citigroup allows that “if the financial stability concern abates and the Fed has indeed hiked for the last time this week, we certainly see scope for 2y tails to converge towards 10y tails.” That said, the bank prefers “to wait until just ahead of the June FOMC meeting to position for a pullback in the 6m2y/6m10y vol ratio to within the 110%-130% range.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- ING sold a $50m 20y NC7 zero-coupon callable (non-Formosa). The EMTN matures May 2043, is callable every year starting May 2030. IRR 5.32%. Self-led. Announced May 16.
- IBRD is working on a $20m fixed callable via SocGen maturing May 2033 NC2 that pays 4.8%. EMTN. Announced May 15.
- Goldman Sachs is working on a self-led fixed callable maturing Nov 2026 NC1 that pays 5.4%. Domestic MTN.
- Goldman Sachs is working on a self-led fixed callable maturing Nov 2025 NC1 that pays 5.3%. Domestic MTN.
- Merrill Lynch is working on a self-led fixed callable maturing May 2043 NC3 that pays 4.8%. EMTN.
- Merrill Lynch is working on a self-led fixed callable maturing May 2034 NC3 that pays 4.9%. EMTN.
- Barclays is working on a self-led fixed callable maturing Jun 2030 NC6m that pays 5.25%. GMTN.
- CIBC is working on a self-led fixed callable maturing May 2028 NC1 that pays 5%. GMTN.
- UBS is working on a self-led fixed callable maturing May 2024 NC6m that pays 5.85%. EMTN.
- UBS is working on a self-led fixed callable maturing May 2024 NC6m that pays 5.02%. EMTN.
- Toronto Dominion is working on a self-led fixed callable maturing May 2026 NC1 that pays 5.3%. GMTN.
- Toronto Dominion is working on a self-led fixed callable maturing Nov 2024 NC3m that pays 5.15%. GMTN.
- Verizon Communications is working on a fixed callable via InspereX maturing May 2030 NC2 that pays 4.7%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2033 NC6m that pays 5.05%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2053 NC6m that pays 5.8%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing May 2028 NC6m that pays 4.5%. 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 2025 NC6m that pays 6.9%. Domestic MTN.