ULC leads a push higher, then recedes
Treasuries have come back to near unchanged after seeing yields rise as much as 7bps in the wake of Powell’s hawkish-tinged testimony to the House Financial Services Committee. A strong 20y auction result – 2bps through the 1pm bid side – helped the rally along. The vol surface started the session higher, led by the ULC, but has since pulled back lower.
3m expiries are last around unchanged to 4 normals higher, with the 2y tail leading while 6m expiries are last around -1.2 normals to 2 normals higher.
Powell’s testimony initially pushed the bid along in the ULC with 1y1y trading at up at 119bps, 119.5bps and 120bps but is now last at 119bps. Trading in the ULC has been more active today with pieces like 2y1y, 1y2y, 3m1y and 2y3y trading along with the 1y1y.
A source noted that recent ULC moves have sometimes been non-correlated with the underlying direction of rates, and indeed that has been the case this week, with vols rising in both underlying rallies (yesterday) and selloffs (today).
Elsewhere, commenting on the very near SOFR transition deadline slated for June 30th, sources point out that some clients have “waited until the last moment” to convert trades over from LIBOR to SOFR, as they have been forced to do so.
In interbank activity, 3m1y traded at 52bps and 53bps, 1m10y traded at 191bps, 1y20y dealt at 1028bps, 3m1y traded at 119bps, 2y1y dealt at 144bps, 1y3y traded at 302bps, 1y2y traded at 218bps versus 2y3y at 382bps, 2y3y also dealt outright at 382bps and 6m10y dealt at 500bps, perhaps versus 1y30y at 1272bps, and 1m5y traded at 134bps, according to the SDR.
Positioning for higher vol on right side and other themes – Barclays
Analysts at Barclays examine recent themes seen in SDR swaption flows over the past couple of weeks. First, the bank finds that investors are positioning for higher volatility via right hand side. To be sure, Barclays sees “swaption volumes have been picking up over the past two weeks, and there has been a notable pickup in activity on the right-hand side, such as 2y30y and 3y10y.” The bank finds that the direction of flow “appears skewed toward buying vol.”
Meanwhile, in short expiries, Barclays notes that systematic selling in gamma in 1m10y and 1m30y “appeared to slow ahead of central bank decisions and remains muted.”
Next, Barclays points out that duration view across the surface remain “mixed” as the bank sees “an even balance between bullish and bearish structures in the swaption market.” For example, Barclays highlights SDR reported bearish structures such as 1y1y 1x1 payer spread struck at ATM+50 vs ATM+100 and a 9m1y 1x2x1 fly struck at ATM+25 vs ATM+100 vs ATM+175, “positioning for a repricing higher of the policy path in 2024” while “bullish structures tend to be more focused on longer tenors,” such as 6m10y ATM-60 vs ATM-85 receiver spreads and 1y30y asymmetric receiver seagulls struck at ATM-80 vs ATM vs ATM+25.
Lastly, Barclays finds that “forward volatility structures in the intermediate sector are regaining popularity” and it highlights that “option structures targeting forward volatility in the intermediate sector of the vol surface have regained popularity among investors,” with for example, option triangles such as 1y1y vs 1y2y vs 2y1y and 2y5y vs 2y10y vs 7y5y through ATM straddles reported, as well as calendar spreads such as 6m5y vs 1y5y with ATM straddles. “Participants likely view these structures as a safer way to trade range-bound rates while being long forward vol,” Barclays reckons.
New structured notes
For a complete review of USD MTN activity over the past week, please see USD MTNs.
- Natixis sold a $20m 10y floating Formosa. The EMTN matures Jul 2033 and pays a coupon of 2y SOFR +165bps. Non-callable. Lead KGI. Announced Jun 16.
- IBRD is working on a self-led fixed callable maturing June 20233 NC1 that pays 5.6%. EMTN.
- CIBC is working on a self-led fixed callable maturing Jul 2025 NC1 that pays 5%. GMTN.
- UBS is working on a self-led step-up callable maturing Dec 2024 NC1 that pays 5.44% to Mar 2024 and then pays 5.45%. EMTN.
- UBS is working on a self-led fixed callable maturing Dec 2024 NC1m that pays 5.73%. EMTN.
- Societe Generale is working on a self-led fixed callable maturing Jun 2028 NC1 that pays 5.25%. Eurodollar.
- Ford Motor Credit is working on a fixed callable via InspereX maturing Jun 2025 NC1 that pays 6.85%. Domestic MTN.
- Verizon Communications is working on a fixed callable via InspereX maturing Jun 2053 NC1 that pays 5.45%. Domestic MTN.
- Verizon Communications is working on a fixed callable via InspereX maturing Jun 2033 NC1 that pays 5.1%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Jun 2028 NC6m that pays 4.95%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Jun 2033 NC6m that pays 5.25%. Domestic MTN.
- Dow Chemical is working on a fixed callable via InspereX maturing Jun 2053 NC6m that pays 5.75%. Domestic MTN.
- Ally Financial is working on a fixed callable via InspereX maturing Jun 2028 NC6m that pays 7.25%. Domestic MTN.