Gamma drops, led by left side
UST yields are again bear flattening with yields last anywhere from 2.5 to 8bp higher on the day, hitting up against the higher end of the recent range. The $15bn 20y auction came 1.1bps through the 1pm bid side, with higher indirects (70.6%) versus slightly lower directs 18.1%).
The vol surface is seeing gamma down on the day, with left side leading the move. For example, 3m expiries in the ULC down anywhere from 3.5 to 6 normals while 3m expiries in longer tails, although down, are only off 1 to 2 normals by comparison. Further out, 6m and 1y expiries are down 1 to 3 normals on the left side, while the right side is unchanged to down -0.5 normal.
1y1y traded at 126bps today outright and also traded in a switch at 126bps and 126.5bps and versus 3m1y at 62.5bps. At around 159.8 annualized or 10bp/day, 1y1y is at the lower end of the recent range that it has seen (159 to 175 annualized) and looks like it could drop further to the lows seen in April (at around 148 annualized), a source suggested.
In interbank activity, 1m2y dealt at 79bps, 1y2y traded at 233bps and 234bps and then down at 232bps (likely versus 3m2y at 128.5bps), 2y5y versus 3y5y traded as a switch at 606bps and 693bps, respectively, 2y5y dealt outright at 608bps, 1y10y dealt at 743bps and 744bps, 3m10y traded at 392bps. In longer expiries, 4y5y traded at 755bps, 2y20y traded at 1488bps and 3y20y traded at 1722bps, and in a switch, 3y10y versus 1y10y traded at 1145bps and 743bps, respectively, according to the SDR.
In skew, 1m30y 30bps each way may have dealt at -4bps while 4m10y 50bps each way traded at +8.5bps, and a 6m1y 100bp each way traded at -12.25bps, according to the SDR. Meanwhile, late yesterday afternoon some 2y1y 100bp each way risk reversals dealt at +5bps and +5.125bps. according to the SDR.
ULC vol short coupled with 6m 2s10s – BNP Paribas
Analysts at BNP Paribas favor steepener expressions such as forward starting steepeners (6m fwd 2s10s) with the current economic backdrop.
However, the bank sees the main challenge with steepening expressions now “is the negative carry arising from the aforementioned cut pricing, which will very quickly need to be proven right or rolled out in time” and “a sustained period of the Fed holding policy at restrictive levels (as is our baseline) could therefore prove quite costly to these positions.”
To be sure, the bank calculates “if the market simply retains roughly steady (constant maturity) forward pricing, shifting it ahead on a meeting-by-meeting basis as cuts go unrealized, steepening expressions will bleed relatively punitive carry—6m 2s10s is some 50bp steeper than spot.”
To offset this decay BNP Paribas looks to rates vol – specifically “while a hard landing scenario would likely support steepening well beyond what is priced into the forwards, we think implied vol is starting from levels that need something close to a hard landing simply to continue.”
“Under a ‘Fed on hold’ scenario, we would expect the coming three to six months to bring the lull in vol that the Fed’s aggressive tightening cycle precluded” and thus BNP Paribas favors monetizing the high levels of implied vol via selling 18m2y straddles and “view steepeners as the better ‘long vol’ insurance against a hard landing.”
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Citigroup is working on a self-led fixed callable maturing May 2033 NC1 that pays 5.4%. Domestic MTN.
- Citigroup is working on a self-led fixed callable maturing May 2026 NC1 that pays 5%. Domestic MTN.
- IBRD is working on a $25m fixed callable via CACIB maturing May 2033 NC2 that pays 4.86%. EMTN. Announced May 17.
- IBRD is working on a $20m fixed callable via CACIB maturing May 2033 NC3 that pays 4.55%. EMTN.
- Goldman Sachs is working on a self-led fixed callable maturing May 2033 NC1 that pays 6%. Domestic MTN.
- JP Morgan is working on a self-led $30m fixed callable maturing May 2033 NC2 that pays 5.45%. EMTN.
- UBS is working on a self-led $10m fixed callable maturing May 2024 NC6m that pays 5.7%. EMTN.
- UBS is working on a self-led fixed callable maturing May 2024 NC6m that pays 5.15%. EMTN.
- Toronto Dominion is working on a self-led $250m fixed callable maturing Nov 2023 NC3m that pays 5.47%. CD format. Domestic.
- Royal Bank of Canada is working on a self-led fixed callable maturing May 2038 NC3 that pays 5.45%. GMTN.