EUR Vol: Top right leads gains

Top right leads gains
Gamma and longer-dated pieces have moved higher today as euro fixed income faced selling pressure during the afternoon session.

The day began with a slight rebound in the underlying and the Bund posted a modest rally but the market has since sold off with the 10y yield last +3bps at 2.46%, “Around 2.50% is obviously a bit of a level,” noted one trader.

In euro implieds, top right gamma led the move higher with 1m30y up +2.4 at 87.1 and has now gained around 10 normals over the past three sessions. The rest of gamma is higher with 3m10y up +1.1 at 96.8 having nudged up over recent sessions. “Generally, there’s a bit of short covering of gamma positions.” 

However, an exception to today’s move was the upper left where 1y to 3y tails moved lower. For instance, 1y1y was last -1.1 at 113.6. Still, one trader wasn’t reading too much into today’s price action, “It’s perhaps being marked lower but still within recent ranges,” a trader said.

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.

Sell EUR 6m1y - NatWest
In its latest euro rates weekly NatWest recommends selling 6m1y volatility. The bank writes:

• “Unchanged for longer has been the underpriced base case for us in recent weeks. That is still tracking and the trades to express the idea are simple: 1s2s or Sep-23/Sep-24 Euribor steepeners (outright or against US).

  
  

• “But our conviction is weakening as the curve steepens. A PCA of front end dynamics also suggests that the reds in the US have underperformed most strongly. That’s not a surprise since the better news on the debt ceiling is there and you might argue that this ‘cheapness’ of SOFR futures really just implies that Euribors need to catch up. But it is still the reds which look cheap – the front end steeepener may no longer be better than an outright short.

  
  

• “Despite falling volatility, selling volatility looks a better way to look for this base case: 6m1y struck at 3.4% (ref 3.57%, spot 3.75%) would make money at expiry between 2.95% and 3.95%. The 3.10%/3.35%/3.75%/4% fly on 6m1y earns close to 15bp running. The payout ratio is 3:2. (Max profit at expiry 15bp 3.35%-3.75%, lose below 3.2% or above 3.9%.)”

New structured issuance

For a summary of recent euro structured issuance, see EUR MTNs: EIB inflation-linked; Handful of callables and CMS.