USD Vol: Range breakout; Realizeds rise; 1y expiries gain

Range breakout; Realizeds rise; 1y expiries gain

Treasuries have sold off further, making it five consecutive sessions of selling, with the belly and long end breaking out of the range that has held since mid-March. Realizeds are hitting double digits in the front end of the swaps curve with swap rates anywhere from 5 to 10bps higher. The vol surface initially saw a muted softening this morning, but as rates pushed further out of the range and realizeds rose, vols are off the lows, with intermediate expiries leading the push higher.

For example, 1y expiries are last around 1 to 2.75 normals firmer, with the left side leading the move, while 3m and 6m expiries are anywhere from -0.25 normal lower to +0.8 normal higher. Vega is also gaining, with 5y and 10y expiries up anywhere from 0.5 to 1 normal higher.

In interbank activity, 2y1y traded at 155bps and 156bps, 3y1y dealt at 171bps, 1y5y dealt at 471bps and 4y5y traded at 755bps. Earlier 3m1y dealt at 61.5bps and 62.5bps and 1m10y dealt at 224bps, while a switch of 6m10y versus 1y10y dealt at 549bps and 749bps, respectively. In longer expiries, 4y20y dealt at 1887bps, 10y10y versus 15y10y dealt at 1576bps and 1692bps, respectively, and 5y10y versus 10y10y traded at 1345bps and 1563bps, respectively. In 30y tails, 6m30y traded at 1005bps and 1m30y dealt at 399bps versus 1m10y at 224bps, according to the SDR.

In a wedge, 2y1y versus 2x3 CFS traded at a spread of 17bps. In skew, a 3m10y 50bps each way risk reversal traded at -6.75bps, according to the SDR.    

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

Opposing risks remain; Stay neutral gamma – JP Morgan

Analysts at JPMorgan stay with their neutral view on gamma on balance of risks. “On one hand, the Fed appears likely to pause in June, and that would create suitable conditions for delivered volatility to decline (thanks to improved policy clarity) as it did after the 2022 May FOMC meeting where the Fed guided markets to expect 50bp hikes,” the bank finds.

Thus, with the case for a Fed paused only strengthening over the recent week, JP Morgan suggests “implieds could be biased lower in the near term.”

On the other hand, “a risk-off trade on the back of worsening debt ceiling brinksmanship could result in lower yields” and “with vol-rate correlations still negative (and likely to remain negative in a crisis environment), that could push implieds higher,” JP Morgan points out.

“We are already likely seeing the impact of growing debt-ceiling fears in close-to-open volatility, which now stands at very elevated levels” and “a rise in close-to-open volatility is typically because of either information flow in non-US market hours, greater cross border correlations, or simply an indicator of nervous markets in a crisis-like environment,” the bank explains.

“In the current environment, the last of these is likely the main reason for such elevated close-to-open volatility” and it adds, “this is not only a barometer of elevated fears around the debt ceiling, but also delivered volatility that is monetizable and therefore supportive of higher implieds.” Thus, taking all these factors together, JP Morgan favors staying neutral on gamma for now.

New structured notes

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

• Standard Chartered is working on a $40m fixed callable maturing May 2033 NC4 that pays 5.18%. EMTN.

   

• Citigroup is working on a self-led $22m fixed callable maturing May 2033 NC4 that pays 5.22%. EMTN.

   

• JP Morgan sold a $50m 25y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2048 and is callable annually starting May 2028. Self-led. Estimated IRR 4.95%. Announced May 16.

   

• Royal Bank of Canada sold a $15m 10y NC5 zero coupon callable (non-Formosa). The EMTN matures May 2033 and is callable annually starting May 2029. Self-led. Estimated IRR 5.125%. Announced May 17.

   

• Citigroup is working on a self-led fixed callable maturing May 2033 NC18m that pays 5.35%. Domestic MTN.

   

• Asian Development Bank is working on a $20m fixed callable via WFS maturing Jun 2033 NC3 that pays 4.55%. GMTN.

   

• Morgan Stanley is working on a self-led step-up callable maturing May 2027 NC3m that pays 5% to May 2025, 5.25% to May 2026 and 5.5% thereafter. CD format. Domestic.

   

• Goldman Sachs is working on a self-led CMS steepener maturing May 2025 NC1 that pays 6*(CMS2y/10y -25bps) +2%. EMTN.

   

• JP Morgan is working on a self-led fixed callable maturing May 2028 callable Feb 2027 that pays 4%. Domestic MTN.

   

• Royal Bank of Canada is working on a self-led inverse FRN maturing Jun 2026 NC1 that pays 7% for the first year, then pays 6*(3.9%-CMS10y), floored at zero. EMTN.  

   

• Royal Bank of Canada is working on a self-led fixed callable maturing May 2028 NC1 that pays 5.25%. GMTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing May 2027 NC6m that pays 5%. CD format. Domestic.

   

• Societe Generale is working on a self-led $25m floating callable maturing May 2028 callable Feb 2028 that pays O/N SOFR +120bps. Eurodollar.

   

• Wells Fargo is working on a self-led step-up callable maturing May 2026 NC1 that pays 5.2% to May 2024, 5.45% to May 2025 and 5.75% thereafter. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing May 2033 NC2 that pays 5.5%. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing May 2030 NC1 that pays 5.35%. Domestic MTN.

   

• ELM BV is working on a $50m putable note via UBS maturing May 2025 and putable Jun 2023 that pays 5%. Credit linked to Doha Bank. Repackaging note. EMTN.