EUR Vol: Left-side leads further decline

Left-side leads further decline
The left-hand side of the vol surface continues to lead the rest of the grid lower with a decline of up to -5.5 normals in the upper left corner. Slightly further out, 1y1y is down by -0.7 at 112.0,

“We’ve come a long way lower and could be finding a bit of support,” said one trader, observing the market in 1y1y had retraced back to the April lows. “But (the move lower) makes sense as we get closer to the terminal rate and the front-end looks more rangebound,” he argued.

 
Elsewhere, the top right continues to see a steady grind lower with 3m10y down by -0.4 at 93.1 and marking another YTD low. “So far the risk from the US debt ceiling hasn’t rippled through too much into the euro market,” he felt. 

 
In the background, day-on-day realised has been muted with the 10y Bund future trading near unchanged while the EUR 10y swap was marked at 2.99% (-1bp).

For euro option trades on the SDR see here and for volumes please see here. Note that the Total Derivatives SDR now shows broker/platform information for each trade, where available.

6m2y payer spreads - SoccGen
Strategists at Societe Generale continue to favour holding long 6m2y payer spreads vs selling 6m2y receivers. The bank explains:

• “In late January, we recommended fading 2024 ECB rate cuts pricing by buying a 6m2y ATMF/+40bp payer spread financed by selling ATMF-30bp receivers. This trade is now in-the-money, with mark-to-market profit of 16bp and positive rolldown until its expiry in late July.

  
  

• “Today’s market pricing is again attractive for initiating similar strategies. Payer skew has vanished in EUR 6m2y swaptions, but receiver skew has jumped to historical highs. As a result, we can finance 6m2y ATMF/+40bp payer spread by selling ATMF-45bp receivers (indicative). The strategy can make up to 40bp profit at expiry if the EUR 2y rate trades at that time more than 40bp above its current 6m2y fwd (i.e. if it trades above 3.45%, a level last seen in late April).

  
  

• “On the other hand, there is a risk of unlimited losses at expiry if the EUR 2y rate falls at expiry more than 45bp below its current 6m2y fwd (i.e. if it falls below 2.60%). The EUR 2y rate below 2.60% in 6M time would require even more aggressive pricing of ECB rate cuts compared to today: for instance, the market pricing the ECB terminal rate at 3.50% in June (vs 3.70% by Sept today) and rate cuts starting in March 2024 at 25/3M reaching 1.75% by late 2025 (i.e. 175bp of rate cuts priced in between late 2023 and 2025 vs 135bp priced today).”

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