USD Vol: Gamma vacillates; Left side underperforms right

Gamma vacillates; Left side underperforms right

Treasuries have climbed back higher, but with the front end lagging still. After touching above 3.755%, the 10y note yield is back down to 3.715% or 0.4bps lower on the day. The $42bn 2y auction came through the 1pm bid side by 2bp but is still the worst performer on the curve today, as 2s10s last 4.5bps flatter at -65bps. The vol surface is seeing small deviations today with gamma around +/-1.5 normals while vega is near unchanged.

Realized volatility has come off after seeing the steady increase in yields of more than a week hitting a bit of a roadblock today with the earlier selloff reverting back toward unchanged on the day in the belly and long end. Gamma has not seen much of a significant trend other than the left side slightly underperforming the right recently. For example, 6m expiries sees the left side underperforming by around 1.5 normals versus roughly unchanged to slightly firmer on the right side.

Sources note an absence of much trading in the ULC recently, as interest has waned with a pause more likely for June. Moreover, a source pointed out that most of the ULC OTC follows Board trading as you can “replicate it all on the Board.”

With the more static outlook (outside the debt ceiling back and forth), interbank activity has been more limited. 1m3y traded at 110.5bps, 1y1y traded today at 130bps and then 129bps, 3m1y dealt this morning at 63bps and 6m1y traded at 93.5bps, and in a switch, 2y3y versus 1y4y traded at 422bps and 406bps, respectively.

In longer tails, 1m10y dealt at 235bps, 6m7y traded at 452bps, 6m10y dealt at 563bps, 1y30y versus 5y5y may have dealt as a switch at 1392bps and 816bps, respectively, and 2wk30y traded at 265bps, while in another switch 2y20y versus 3y20y traded at 1523bps and 1760bps, respectively, according to the SDR.

Meanwhile in skew, 2wk10y 20bp each way risk reversal traded at -1bps today after trading late yesterday at -4bps and then -3bps, according to the SDR.

Elsewhere, in structured notes, Wells Fargo printed the first long dated ZC callable Formosa for the year. A source noted that the disappearance of these type of structures has eliminated a key source of vol supply for dealer desks in vega - as well as source of revenue. 

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

No directional bias; Right side more active - Barclays   

Analysts at Barclays examine SDR data over the two weeks ending 19 May for key themes from the swaption data. First, the bank finds that “vol market activity has shifted to the right hand side.”

“With markets pricing a pause in June from the Fed, swaption volumes reported on SDR have increased from the lows of the previous two weeks” and “in particular, the pickup in activity has been primarily in longer tenors,” Barclays assesses. Further, it sees “little directional bias in reported vol flows” and the bank’s estimates suggest “little net vol buying or selling over the past two weeks across most parts of the surface.”

Second, Barclays points out that “swaption market participants have been buying top left payers, likely as a cheap upside risk hedge.” For example, it notes “a spike in reported activity in top left payers, likely as cheap upside risk protection” with for example, 3m1y, 6m1y and 1y1y high strike payers or payer structures around 5% have been reported on SDR.

Lastly, Barclays highlights “no strong bias on rate direction given data uncertainty and tail risks ahead” and “in contrast to receiver-dominated activity in April, there is little directional rate bias revealed by recently traded structures.” For example, on one hand, it notes that “payer-based structures include 3m10y payer spreads as well as 1y1y payer fly struck at 3.25% versus 3.75% versus 4.0%.”

On the other hand, Barclays sees examples of receiver-based structures include “low strike 3y1y receiver spread struck at ATM-155 versus ATM-255, and 3m10y ladder struck ATM-35 versus ATM-65 versus ATM-95, targeting a weak medium-term economic outlook.”

New structured notes

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

• Wells Fargo sold a $25m zero coupon callable 30y NC10 Formosa. The EMTN matures May 2053, is callable annually from May 2033 and has an estimated IRR of 6.06%. Leads KGI and Yuanta. Announced May 22.

   

• ING Bank sold a $50m zero coupon callable 5y NC1 (non-Formosa). The EMTN matures May 2028, is callable annually from May 2024 and has an estimated IRR of 5.59%. Lead N/A. Announced May 23.

   

• BNP Paribas sold a $271m 5y FRN Formosa. The EMTN matures Jun 2028 and pays O/N SOFR + 130bps. Leads BNPP, CTBC, E Sun, Mega, President, Sinopac, Taishin, Yuanta. Announced May 23.

   

• IBRD is working on a $12m fixed callable via Nomura maturing Jun 2033 NC1 that pays 5.7%. EMTN. Announced May 23.

   

• Asian Development Bank is working on a $20m fixed callable via Nomura maturing Jun 2033 NC3 that pays 4.8%. EMTN.

   

• Bank of America is working on a self-led step-up callable maturing Jun 2038 NC3 that pays 5.2% to Jun 2026, 5.75% to Jun 2030, 6% to Jun 2034 and 6.5% thereafter. Domestic MTN.

   

• Santander is working on a self-led fixed callable maturing May 2026 NC1 that pays 1.1%. Eurodollar.

   

• Dow Chemical is working on a fixed callable via InspereX maturing Jun 2028 NC6m that pays 4.8%. Domestic MTN.  

   

• Dow Chemical is working on a fixed callable via InspereX maturing Jun 2033 NC6m that pays 5.3%. Domestic MTN.  

   

• Dow Chemical is working on a fixed callable via InspereX maturing Jun 2053 NC6m that pays 5.95%. Domestic MTN.  

   

• Ally Financial is working on a fixed callable via InspereX maturing Jun 2033 NC6m that pays 7.35%. Domestic MTN.  

   

• Ally Financial is working on a fixed callable via InspereX maturing Jun 2025 NC6m that pays 6.95%. Domestic MTN.