USD Vol: Implieds drop further; Longs pared

Red down arrow 11 Jun 2020
Gamma and intermediate vol has sunk down further off the back of lower realizeds, the resolution of the debt ceiling and cementing of June pause.

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  • Implieds drop further; Longs pared

  • Go short duration via 1x1 3m10y payer spread – BNP Paribas  

  • New structured notes


    Implieds drop further; Longs pared

    Treasuries have drifted lower in a bear flattening move with yields currently anywhere from 2bps lower in the back end to 5bps higher in the front end. The vol surface has plunged lower this afternoon, with gamma in lower by 1 to 6.5 normals in 3m and 6m expiries and down around 1.5 to 5 normals for 1y expiries. The move has been led by the ULC.


    The absence of new economic data until next week, the cementing of a pause for June along with the resolution of the debt ceiling crisis has longs paring positions, sources judge. Moreover, the more rangebound price action and the lower realizeds are further reasons for vols to drop.  


    Overall interbank activity has been light. 1y10y traded at 719bps and 718bps and is last mid around 714bps on the screens. 3y10y traded at 1129bps and then down at 1127bps and is showing 1123bps as mid now, 1m30y dealt at 345bps and then down at 340bps, 6m30y traded at 901bps and 1m10y dealt this morning at 202bps but is now around 196bps mid.


    In switches and flies, a 3y20y versus 1y20y dealt at 1695bps and 1063bps, respectively, and a 7y30y/9y30y/10y30y fly traded at 2805bps, 3020bps and 3116bps, respectively, according to the SDR. In the ULC, 3m2y traded at 123.5bps and a switch of 6m3y versus 1y3y traded at 238bps and 312bps.


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



    Go short duration via 1x1 3m10y payer spread – BNP Paribas

    Analysts at BNP Paribas see the balance of risks skewed toward a Fed tightening in July, after a pause in June due to a higher pace of job creation and still high wage inflation. With this backdrop, the bank favors adding limited risk tactical shorts and positioning for contained upside to yields.


    “While our forecasts argue for outright tactical shorts versus the forwards, we are somewhat mindful of potential stumbling blocks to this process over the summer,” BNP Paribas reasons and “in particular, one source of uncertainty is how the liquidity drain from TGA rebuild coupled with ongoing QT plays out, particularly with front-end rates potentially moving higher as well.”


    "That could put further pressure on portions of the US banking sector and shift focus back onto risks of a more disruptive tightening in credit conditions,” it suggests.  As a result, BNP Paribas favors positioning for higher yields via 1x1 3m10y A/A+50bp payer spreads, with “the drag from carry is 1bp over the first month,” it calculates.



    New structured notes

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


    • Natixis sold a $77m 5y NC4 floating rate callable Formosa. The EMTN matures Jun 2028, is callable in Jun 2027 and pays SOFR +130bps floored at 0%. Leads are Taishin, Cathay, E.Sun, KGI and Mega International. Announced Jun 5.


    • JP Morgan is working on a self-led fixed callable maturing Dec 2031 NC7 that pays 5.5%. Domestic MTN.


    • JP Morgan is working on a self-led fixed callable maturing Jun 2026 NC1 that pays 5.625%. Domestic MTN.


    • JP Morgan is working on a self-led fixed callable maturing Jun 2025 NC1 that pays 5.62%. Domestic MTN.


    • Toronto Dominion is working on a fixed callable via Jeff and TD maturing Jun 2026 NC6m that pays 5.6%. GMTN. 


    • Verizon Communications is working on a fixed callable via InspereX maturing Jun 2030 NC1 that pays 5%. Domestic MTN.