Vols soften on debt ceiling resolution, June skip talk
Treasuries are again bull steepening, with the front end seeing yields up to 7.5bps lower while the back end is only off around 2bps. The vol surface is down across the board, with 1m expiries sinking down 9 to 13 normals, 3m expiries softer by 3 to 6 normals, 1y expiries down around 2-3 normals.
“The premium for the debt default is unwinding,” remarked one source, who regarded that some quarters were certainly very anxious over the potential for an actual default, but now that is passing, and as a result, the pricing for the event is now being shed.
Moreover, the likelihood of a pause has increased with the narrative of a skip being laid on heavily in the past 24 hours, and that, along with the potential of the Fed being on hold maybe for the rest of the year is also weighing on implieds, a source suggested.
At the same time, however, vol/rate directionality versus skew remains at odds, with short expiries receivers over. One source argued that receivers over pricing is a function of the level of rates, which are on the higher end, and that “the risks that are skewed toward a recession” and therefore, he suggested that dealers remain not wanting to be short vol with that backdrop. No skew traded today, but 1y1y yesterday saw a market of -7.5/-5.25bps, which was more negative than previous, one source noted.
In trading activity today, 1m5y dealt at 159bps, 6m5y traded at 559bps, 6m10y dealt at 551bps, 3m30y traded at 679bps, and early in the session, 3m5y dealt at 267bps and 1m30y traded at 378bps, according to the SDR.
In the ULC, 3m2y traded at 133.5bps, and 3m3y traded at 184.5bps but is now lower now, with the mid around 181bps, a source pointed out. Very early on 2y2y traded at 293bps, according to the SDR.
LHS vol may increase with lower banking concerns – Barclays
Analysts at Barclays believe that LHS vol demand could increase as banking concerns fade. “Borrowers’ need for caps/floors was a big driver of demand for vol on the LHS of the surface through 2022,” but in early 2023, “lending growth slowed, with a further slowdown after the March banking crisis.” As a result, this “reduced demand for new cap/floor volatility, and this source of hedging demand has likely not been a very big driver of the left hand side of the vol surface for the path few months.”
However, “credit concerns from banking issues are slowly fading” and when examining past and upcoming trends in syndicated loan issuance, Barclays finds it suggests “that after a couple of months of weak loan issuance, June is likely to see a substantial pickup, with net issuance potentially turning positive for the first time since January this year.”
Further, in an analysis of month-over-month change in gross syndicated loan issuance since early 2021 versus the month-over-month change in total cap/floor notional volume reported on SDR, Barclays finds that the data shows “a clear positive correlation—suggesting that a substantial fraction of borrowers have tended to buy rate protection.”
Thus, Barclays concludes “the potential pickup in syndicated loans in June could also mean increased cap/floor demand, and this would lead to upward pressure on the left hand side of the swaption vol surface” and it notes that the typical range of cap maturities reported on SDR “has tended to be anywhere from 1y to around 4y, which means vol demand out from 1m1y to the 3y1y point in swaptions.”
In the meantime, “supply of volatility (which has largely been restricted to the very top left) is likely to slowly fall, especially if the debt ceiling is resolved and Treasury bills emerge as an alternative for those looking for safe short-term assets” though May “is shaping up to be another strong month of short tenor callable issuance (but callable issuance in May will not be as large as April).”
With this backdrop, Barclays favors maintaining its recommendation to be long high strike 6m1y payers, as well as low strike 1:1 3y1y receiver spreads, given that LHS vol in general is likely to be in demand.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Bank of America is working on a self-led $26m fixed callable maturing Jun 2033 NC2 that pays 5.6%. Domestic MTN.
- 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.
- IADB is working on a $25m fixed callable via WFS maturing Jun 2028 NC3 that pays 4.3%. GMTN.
- AFDB is working on a $25m fixed callable via WFS maturing Jun 2028 NC2 that pays 4.7%. GMTN.
- Citigroup is working on a self-led fixed callable maturing Jun 2028 NC1 that pays 5%. EMTN.
- Citigroup is working on a self-led fixed callable maturing Jun 2028 NC1 that pays 5.6%. Domestic MTN.
- Goldman Sachs is working on a self-led fixed callable maturing Jun 2026 NC6m that pays 6%. Domestic MTN.
- UBS is working on a self-led step-up callable maturing Jun 2024 NC6m that pays 5.08% to Dec 2023 and then pays 5.09%. EMTN.
- UBS is working on a self-led fixed callable maturing Jun 2025 NC1 that pays 5.1%. EMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Jun 2033 NC3 that pays 5.6%. GMTN.
- Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2024 callable Mar 2024 that pays 5.5%. GMTN.
- Royal Bank of Canada is working on a self-led CMS-linked note maturing Jun 2025 NC1 that pays 6% as long as CMS1y is 0-6.2%.
- Societe Generale is working on a self-led fixed callable maturing Jun 2026 NC6m that pays 6%. EMTN.
- Wells Fargo is working on a self-led step-up callable maturing Jun 2026 NC1 that pays 5.4% to Jun 2024, 5.7% to Jun 2025 and then 6% thereafter. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing Jun 2028 NC1 that pays 5.6%. Domestic MTN.
- Wells Fargo is working on a self-led fixed callable maturing Jun 2030 NC1 that pays 5.75%. Domestic MTN.