EUR Vol: Short-dated gamma gains

Chart up line Oct 2022
Short-dated gamma moved higher amid a 10bps shift in yields.

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  • Short gamma gains
  • Payer spread - Barclays
  • New structured issues

    Short gamma gains
    Short-dated gamma moved higher today amid a 10bps drop lower in yields following signs of a US debt deal being reached. In Europe, weaker-than-consensus Spanish inflation data lent support to fixed income and propelled the short-end of the curve higher.

    In euro vol, 1m dates gained 2.5 to 5 normals while 2m moved up to 5.5 normals higher and now incorporates the July ECB meeting. The belly saw the biggest gain with 2m5y last +5.5 at 110.5 having flirted with 100nvol less than a week ago.

    Farther out, the rest of the grid dipped lower with 2y expiries and longer edging slightly lower. For instance, 2y2y was last -1.1 at 116.1 although it remains within the range of the past week 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.


    Payer spread - Barclays
    In its latest rates weekly Barclays recommends entering 1y5y 1X1.5 zero-cost payer spread (ATM, ATM+33). The bank explains:

    • "The trade exhibits a bullish bias at initiation and only delivers a negative P&L at expiry if 5y rates exceed 4.06% in one year’s time. While some further push higher in EUR 5y rates cannot be ruled out from here (eg, if the market moves towards more fully pricing a September hike), we view a sustained push above 4% as unlikely.

    • “Such a trajectory for 5y rates would likely necessitate continuation of ECB rate hikes well beyond September, in our view. This would be at odds with the current mainstream views on the Governing Council as mentioned above, and is very much at odds with current EUR front-end pricing.

    • “With respect to the latter, the market is currently pricing in negligible further policy tightening after the September meeting (only c.2bp of hikes priced for the October meeting at the time of writing). We therefore view the trade as an effective way to benefit from any medium-term drift lower in outright EUR yields, with protection in the event of some continuation of bearish price action. The trade also benefits from positive carry, as well as supportive vol RV dynamics.”


    New structured issues

  • NRW.Bank issued €20m 5y NC1 callable due Jun 2028. Coupon pays 3.6% with single call in Jun 2024. Led by DZ Bank.

  • KfW issued €30m 12y NC3 callable due Jun 2035. Coupon pays 3.9% with single call in Jun 2026. Led by Credit Agricole.

  • Goldman Sachs issued €10m callable CMS due Jun 2035. Coupon pays EUR 20y CMS capped at 7% and floored at 4.5%. Single call in Jun 2030. Self-led.

  • SPIRE issued €75m EMTN repack due 15 Jun 2024. Coupon pays 3mE +30bps and backed by unspecified repack. Further details unavailable. Led by Citi.