EUR Vol: Pockets of support eyed amid ULC bounce

Pockets of support eyed
Euro implieds are finishing the session mixed as some dealers identified “pockets of support” for some pieces across the grid. In the underlying, euro rates have sold off in a continuation of Friday’s post-US payrolls move with the 10y Bund yield last up by +7bps at 2.38%.

In the top left, 1y1y gained +1nvol to 113.3 having hit an intra-day low of 111nvol at the end of last week. “It’s looking pretty low and is an area we are seeing pockets of support emerging,” felt one trader. To recap, 1y1y has declined around 20 normals since the beginning of May.

Elsewhere, the picture was more mixed with some pieces such as 3m10y declining by -1nvol. “But it’s a Monday session so I wouldn’t read too much into it,” pointed out one trader.

Further out, vega was unchanged or 0.1 to 0.2 normals higher and traders agree it has held up quite well in recent weeks. “Compared to other areas such as the top left it has outperformed. But the bottom right trades on flows and it has been a bit tepid recently,” one trader felt.

Towards the close of session 5y10y was unchanged at 90.5, 10y10y was +0.1 at 70.4 and 10y30y unchanged at 63.7.

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.

Take advantage of bottom right vol - Barclays
Strategists at Barclays recommend taking advantage of bottom right volatility via option triangles. The bank writes:

• “Bottom right volatility is supported by two factors. First, it is being driven by uncertainty about long-term rates… Moreover, uncertainty around factors that drive the real rate (such as the labour market) is now slowly creeping higher, as seen from the pick-up in unemployment rate forecast variance since 2022.

  
  

• “Looking at long-dated volatility as an asset class, there tends to be a summer seasonal slowdown in callable issuance, which could also support long-dated volatility. Vol supply from callables has been depressed in EUR this year (around 45% of same period in 2022 and 25% of 2021) due to higher rates and low redemption demand. The summer seasonal could further support bottom right volatility.

  
  

• “One trade to take advantage of bottom right volatility remaining high is an option triangle constructed as long 5yf 10y20y vol vs buying 5y10y and 15y20y vs 5y30y ATM straddle. Inversion in 10y20y forward term structures is quite large from a historical perspective. Therefore, forward volatility seems especially cheap to long bottom right vol…”

New structured issues
For a summary of recent structured issuance, see EUR MTNs.