USD Vol: Gamma rises further; Illiquid

Illiquidity
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Gamma is up again today with wider bid offer, low liquidity and nervous price action. Citigroup sees USD vs EUR vol levels as stretched.

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  • Gamma rises further; Illiquid 

  • Citigroup: US vs EUR vol looks stretched  

  • New structured notes

     

    Gamma rises further; Illiquid 

    Treasuries have continued to push lower and flatter and futures are now pricing a near 50% percent chance of a 25bps hike in June, after hawkish Waller comments yesterday made an impression along with stronger data today. Though the debt ceiling has not been resolved, headlines were more positive today, sources note.

     

    The vol surface is firmer across the board today, with 1m expiries leaking out firmer from mid-morning along with longer-dated gamma points. 3m expiries are last around 2.5 to 4.5 normals higher on the day, 6m expiries are roughly 1 to 1.5 normals higher. A source noted that the markets continue to feel "nervous."  

     

    Moreover, the liquidity in vol has been sparse, sources say, with offers lifted in wide bid/offers. For example, a trader noted that 1y10y was 762bps/770bps, only to have the 1y10y lifted at 770bps. Meanwhile, the right side has been better bid today despite the lower realizeds versus the left, a source pointed out. “The left side is keeping up today, but not really outperforming,” the source noted.

     

    Interbank activity today has included 6m1y trading at 95.5bps, 3m1y at 66bps, 3y1y at 177.5bps, 1m5y at 167bps, 3m5y at 275bps, 1y30y at 1415bps, 5y5y at 823bps and in a switch 4y1y versus 5y5y dealt at 189bps and 882bps, respectively.

     

    As for skew, 3m10y 50bp each way dealt at -2bps, according to the SDR, after seeing a bid at -5bps today, sources say. The receivers over in gamma risk reversals for 10y tails is likely as reflection of the relatively high level of underlying rates, one trader suggested.

     

     

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

     

     

    Citigroup: US vs EUR vol looks stretched

    Analysts at Citigroup find “the divergence between US (inverted) and EUR (resteepened) vol slopes looks stretched.”

     

    Indeed, the bank highlights that “for most of the past year, US and EUR rates vol have traded largely in line with each other with high inflation being the dominant risk dictating rates moves in both regions” but since March, “a clear divergence has developed with the regional bank concerns and the debt ceiling uncertainties keeping US implied vols resilient, while EUR implied vols have steadily declined on the potential pulled forward of the end of the ECB’s tightening cycle.”

     

    “Beyond the divergence in outright vols, the divergence between the US and EUR vol slopes has been even more notable and extreme,” Citigroup points out as “the 3m vs 1y expiry vol slopes in the US are currently still well inverted across all tails, but the EUR 3m vs 1y expiry vol slopes have already re steepened meaningfully as EUR short-dated vols cheapened in recent weeks.”

     

    Going forward, Citigroup sees “scope for the US and EUR vol slopes to re-converge, possibly with some flattening on the EUR side but mostly from resteepening on the US side.”

     

    In the US, even though the vol term structure looks fair relative to the level of outright vol, Citigroup expects “a drift lower in vol to reverse some of the inversion in the vol term structure with short-dated expiries leading the cheapening” and it sees some of the potential drivers for lower vol including a debt ceiling resolution, lower macroeconomics vol, and a Fed pause.

     

     

    New structured notes

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

     

    • Morgan Stanley is working on a self-led $36 fixed callable maturing Jun 2033 NC3 that pays 5.55%. EMTN.  

       

    • Citigroup is working on a self-led fixed callable maturing Jun 2028 NC1 that pays 5%. EMTN.

       

    • Merrill Lynch sold a $40m 10y NC5 fixed callable Formosa 5.3% due Jun 2033. The note is callable annually from Jun 2028. Leads are KGI and Sinopac and announced May 24.

       

    • Barclays is working on a self-led $50m fixed callable maturing Jun 2025 NC1that pays 5.5%. EMTN.

       

    • UBS is working on a self-led $50m fixed callable maturing Jan 2025 NC1m that pays 5.88%. EMTN. Credit linked to Bank of China HK.

       

    • UBS is working on a self-led $20m fixed callable maturing May 2024 NC6m that pays 5.85%. EMTN.

       

    • Royal Bank of Canada London is working on a self-led inverse FRN maturing Jun 2026 NC1 that pays 7% for the first year and then pays 7*(4%-CMS10y), floored at zero. EMTN.  

       

    • Bank of Montreal is working on a self-led fixed callable maturing Jun 2033 NC6m that pays 4.9%. CD format. Domestic.  

       

    • Royal Bank of Canada is working on a self-led CAD extendible with initial maturity Jun 2028 and then extendible to Jun 2038 that pays 5.27%. Canadian.

       

    • Royal Bank of Canada is working on a self-led CAD extendible with initial maturity Jun 2028 and then extendible to Jun 2038 that pays 5.55%. Canadian.

       

    • Bank of Montreal is working on a self-led CAD extendible with initial maturity Nov 2027 and then extendible to May 2033 that pays 4.86%. Canadian.

       

    • Bank of Montreal is working on a self-led CAD extendible with initial maturity May 2032 and then extendible to May 2033 that pays 4.86%. Canadian.