EUR Vol: Implieds stall amid rate rally

Computer lines code 30 Jan 2023
Implieds stalled with short expiries moving lower as euro rates rallied through most of the session.

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  • Implieds stall amid rate rally
  • Bear flattener via payers - JP Morgan
  • New structured issues

    Implieds stall amid rate rally
    Bunds have rallied higher following weaker than consensus German IFO at the start of the session and having shrugged off a sharp drop in gilts amid higher than expected UK CPI data. The 10y Bund future was last up 10 ticks while the gilt was trading around 40 ticks lower as the sterling curve sharply bear-flattened.

    Meanwhile, euro implieds have been mixed with one dealer struggling to identify an overarching theme from today’s session.

    “Directionally, the rate rally has helped to keep a lid on vols,” a dealer said. For instance, 1m expiries have lost up to 4.5 normals with 1m5y last down by -4.5 at 99.7nvol and marking a new 2023 low.

    Across the grid, one trader observed that, “The left-hand side is continuing to underperform a little bit as we’ve seen some covering on the right-hand side. But that short covering seems to have paused for now,” he noted.

    Elsewhere, longer-dated vega pieces were “mixed” and “little changed” with 10y10y last -0.2 at 75.3 and roughly in the middle of the range from the past month or so.

    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.


    Bear flattener via payers - JP Morgan
    In its latest rates research JP Morgan continues to favour holding a conditional 1s/5s bear flattener via 1m payers. The bank writes:

    • “On the swap curve, we recommend 1s/5s conditional bear-flattener as a hedge to our bullish duration view. The 1s/5s swap curve has exhibited a strong negative directionality to yields and we expect this dynamic to continue over the near-term.

    • “The repricing lower of the volatility surface, along with a steepening of the vol curve across tails (1y implied is below 5y implieds), allows us to enter conditional bear flatteners at level that is around 4bp better than forwards; the volatility difference more than offsets the negative rate curve carry of flatteners. Overall, we recommend 1s/5s conditional bear flatteners implemented via 1m payers.”


    New structured issues

  • DZ Bank issued EUR 5y NC2 callable due Jun 2028. Coupon pays 4.27% with single call in Jun 2025. Self-led.

  • Barclays issued €10m CMS-linked EMTN due Jun 2033. Coupon pays EUR 10y CMS * 1.31, capped at 6%. Self-led.

  • SPIRE issued a €25m 5.11% repack due 18 Sep 2031 via BofA. Repack unconfirmed.