USD Vol: Debt ceiling angst propels ULC, gamma higher
Debt ceiling angst propels ULC, gamma higher
Treasuries saw yet another flattening as debt ceiling concerns saw very front end bill yields surge over 100bps and further out 2y yields rose to 4.39% before receding back to 4.36%. The vol surface ratcheted up higher with the left side reflecting the angst in the front end. For example, 3m and 6m expiries have gained around 1 to 4 normals, led by the left, while 1y expiries have lifted roughly 0.5 to 2.6 normals last, also led by the left.
“It is wave after wave” remarked one source, with the debt ceiling concerns, though the source characterized the vol bid as "slowly drifting" higher rather than say, a panic-driven spike. For example. 6m1y traded at 93.5bps and then up to 94.5bps, 1m10y traded up at 240bps and 1y10y dealt at 768bps and then 769bps, while earlier, 1m5y traded up at 163bps, then 165bps and then 166bps and is last around 167bps, and further out, 5y5y dealt at 822bps, according to the SDR.
More very short dated options have also dealt recently with some 1day10y trading last yesterday as well as 1wk10y.
Meanwhile, skew has been more active going into month end next week. For example, 3m2y 50bp each way risk reversal traded at -11bps and 4m30y 50bp each way traded at +9bps and 3y5y 100bp each way risk reversal at +36bps, according to the SDR.
For USD option trades on the SDR see here and for volumes please see here.
JP Morgan: Going long gamma
Analysts at JP Morgan favor turning bullish on gamma based on a few recent developments. “First, Fed officials have reiterated their focus on inflation risks and have uniformly pushed back against expectations of rate cuts anytime soon” while “they were slightly more mixed on whether policy is currently restrictive enough or whether more tightening is necessary.”
As a result, JP Morgan finds that “implied distributions from the options market have shifted again” and “there are now significant weights being placed on all scenarios, including further hikes, a near term pause and an easing scenario.” Thus, the bank finds “this could mean less policy clarity as we approach the June meeting; and with the cone of possibilities now potentially wider, implieds could be biased higher.”
Second, JP Morgan finds that “close-to-open volatility continues to stand at elevated levels” and as one of its preferred gauges of ‘jump risk’, the bank considers that “its elevated nature suggests that implied volatility is unlikely to decline significantly.”
Third, when refreshing its empirical model for monthly returns from delta hedged long straddles, JP Morgan finds that it is now “pointing to statistically significant positive returns for long gamma positions in the wings.”
Therefore, the bank recommends “turning bullish on gamma, with a preference for expressing such a view in the wings of the curve.” In addition, on a relative basis, based on the discussion above, it recommends buying 6m30y straddles versus selling a theta-neutral amount of 6m5y straddles, delta hedged on a daily basis.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Goldman Sachs is working on a self-led $30m fixed to FRN note maturing Jun 2025 NC1 that pays 5.95% for the first year, then pays a spread*(1+given variable) +1%, floored at zero. EMTN.
- Goldman Sachs is working on a self-led $30m fixed to FRN note maturing Jun 2025 NC1 that pays 6% for the first year, then pays a spread*(1+given variable) +1%, floored at zero. EMTN.
- JP Morgan is working on a self-led fixed callable maturing May 2026 NC1 that pays 5.3%. Domestic MTN.
- Standard Chartered is working on a self-led $50m fixed callable maturing Jun 2025 NC1 that pays 5.5%. EMTN.