BoC hike spooks rates, vol higher
Treasury yields last are up anywhere from 7 to 11.5bps, led by the belly of the curve. Yields are testing the top end of the recent range after the BoC unexpectedly raised rates by 25bps today. “The central banks are still hiking,” remarked one source and in the backdrop the economic data has “still been decent” while the bank failures “came and went.”
Vols are higher across the board with the proximity to the upper end of the range back in view along with the higher realized volatility. 3m expiries are around 2.5 to 4.5 normals higher, led by the belly of the curve, while 1y expiries are out around 1 to 2 normals and vega points are firmer by 0.25 to 1.5 normals.
Trading activity has picked up today with a lot more longer expiry points trading along with longer tails. 2y10y has been active with trading at 965bps, 963bps and 969bps last (likely versus 10y10y ay 1565bps). 10y10y traded at 1565bps outright as well.
1m30y traded at 351bps and at 352bps versus 1m10y at 203bps, 3y10y dealt at 1120bps and 4y10y traded at 1233bps and then 1240bps. 5y5y traded versus 10y30y at 800bps and 3119bps, respectively. 3m10y dealt at 358bps, 360bps, 361bps, and 362bps (versus 3m30y at 633bps), according to the SDR.
More on the left side, 6m2y dealt at 173.5bps, 1m5y dealt at 145.5bps, 5y1y traded at 191bps, 7y1y dealt at 202bps, 1y2y traded at 223.5bps, 2y1y traded at 151bps, 1y1y traded at 123bps, 124bps and 125bps (possibly versus 3m10y at 362bps).
As for skew, yesterday late a lot of 10y10y 300bps wide strangles versus straddles traded at 673bps and 671.5bps for the strangle versus 1560bps for the straddle.
Sell 6m10y versus 6m30y – Citigroup
Analysts at Citigroup look to short 10y tails versus 30y tails. “A structurally unchanged long-run neutral rate should keep long-end rates anchored, which should result in 30y tails’ underperformance relative to the rest of the swaption surface” and ”this has certainly been the case with the 10y vs 30y and 5y vs 30y vol ratios reaching the peak of their long-run historical range,” Citigroup finds.
In that context, the bank finds the most recent outperformance in 10y tails vs 30y tails “especially interesting, given that it has not retraced despite the outright cheapening in implied vols” and it suggests that the 10y tails outperformance relative to 30y tails “might be overstretched.”
Also, Citigroup’s macro vol fair value model supports the view as it currently shows that “right-side vol in general looks cheap” and that “30y tails are the most undervalued sector on the surface and look cheaper than 10y tails on a relative basis.”
In addition, the bank points out that a regression of the 6m10y/6m30y vol ratio on the recent realized rate/curve beta shows that 6m10y vol “looks extremely rich relative to 6m30y vol” with the relative richness “about 2 standard deviations above the average based on the relationship over the past 3 years.” Citigroup notes that “in the past, the relative richness has rarely exceeded the +2 stdev threshold and has exhibited a strong tendency to mean revert from this extreme level.”
Thus, with this backdrop Citigroup favors shorting 6m10y vol against 6m30y vol, as it believes “6m10y vol can cheapen by about 7 normals against 6m30y vol.”
Rather than expressing this view in a straddle switch, Citigroup favors implementing “only the payer side of the switch and hedging out the delta” as it “prefer to avoid the receiver side of the straddle switch, because we believe that there is a higher chance of a meaningful bull steepening in 10s30s if the forecast of a recession is realized.” In contrast, the bank is “more comfortable implementing the switch via payers because we see limited scope for a rates sell-off in general.”
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 fixed callable maturing Jun 2033 NC2 that pays 5.3%. Domestic MTN.
- JP Morgan is working on a self-led fixed callable maturing Jun 2026 NC1 that pays 5.4%. Domestic MTN.
- JP Morgan is working on a self-led fixed callable maturing Jun 2026 NC2 that pays 5.3%. Domestic MTN.
- Barclays is working on a self-led fixed callable maturing Jun 2033 NC1 that pays 5.75%. GMTN.
- UBS is working on a self-led step-up callable maturing Jun 2024 NC6m that pays 5.3% to Dec 2023 and 5.31% thereafter. EMTN.
- UBS is working on a self-led step-up callable maturing Jun 2024 NC11m that pays 5.2% to Dec 2023 and 5.21% thereafter. EMTN.
- UBS is working on a self-led fixed callable maturing Jul 2025 NC1 that pays 4.25%. EMTN. Credit linked to BofA.
- UBS is working on a self-led fixed callable maturing Jun 2025 NC1 that pays 5.56%. EMTN.
- UBS is working on a self-led fixed callable maturing Jun 2025 NC1 that pays 5.5%. EMTN.
- UBS is working on a self-led fixed callable maturing Jun 2025 NC1 that pays 5.64%. EMTN.
- UBS is working on a self-led fixed callable maturing Jun 2024 NC1 that pays 5.26%. EMTN.
- UBS is working on a self-led fixed callable maturing Jun 2026 NC1 that pays 5.55%. Domestic MTN.
- Bank of Montreal is working on a self-led fixed callable maturing Jun 2026 NC6m that pays 5.7%. Domestic MTN.