USD Vol: Vols pop higher with double digit realizeds

Vols pop higher with double digit realizeds  

Treasuries have seen a double-digit selloff in an illiquid move and swap rates are last 10 to 17bps higher on the day. The implied vol surface has popped up higher with the large realized move, with 3m expiries rising 4 to 7 normals and 1y expiries lifting 1 to 2 normals on the day, with the left side leading the move higher across the surface.

Trading activity has seen scant, however, as last-minute LIBOR conversions continue to divert attention from regular trading ahead of the cessation of LIBOR tomorrow.

In interbank activity, 1y1y traded this morning at 119bps and then traded up to 122bps and 123bps on switches, with 1y1y dealing at 122bps versus 6m1y at 80bps and also 1y1y trading at 123bps versus 6m1y at 80.5bps, respectively.  Elsewhere, 2y1y traded at 152.5bps, 1y10y traded ay 709bps, 3m10y dealt early at 355bps but is now around 358bsp mid, and 1m10y traded at 196bps and 197bps an 2y1y traded at 152.75bps, according to the SDR.  

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

BNP Paribas – Buy a 1y5y5y mid curve payer spread  

Analysts at BNP Paribas find that “the cycle is at a stage where there are clear arguments for owning duration” as “yields are elevated relative to levels seen over the last decade, the Fed seems to be nearly done with hikes, and there is evidence that the economy is indeed slowing.”

However, BNP Paribas sees “important and somewhat durable shifts that should erode some of the upside to owning duration that leave the risk/reward to duration longs as less asymmetric than the above considerations might imply.”

In addition to potential mechanical constraints from a higher r*, the bank sees some key factors. First,  it sees more balanced inflation risks as global inflation pressure has presented “a challenge not seen in decades” and “even if the level and volatility moderates, we think there are reasons to expect inflation to sustain higher levels than seen before Covid.”

Thus, BNP Paribas argues that “a more balanced (less negatively skewed) inflation regime should support more balanced (less negative) nominal risk premium.”

Second, the bank points out supply-side volatility and policy reactivity as “factors such as slowing globalization and geopolitical conflict continue to pose supply disruption risks, curtailing the value of short inflation exposure as a hedge to growth risk.” Further, it views that the “central banks’ pursuit of a more overtly restrictive policy stance and the potential limitation on how far or fast central banks can comfortably ease may curb the rate/risk asset correlation investors expect.”

Third, BNP Paribas sees a rising debt share as “significant Fed asset purchases, robust commercial bank demand, and strong risk asset performance saw the fixed-income share of non-bank assets fall to multi-decade lows” and “while dynamics have turned… with the Fed shrinking its balance sheet amid structurally higher fiscal deficits,” BNP Paribas still expects “the relative scarcity of fixed-income securities to continue to wane.”

Lastly, BNP Paribas notes that the range of factors “discussed in relation to the US are present abroad as well, with range shifts in the rest of the G3.” As a result it views “the cessation of negative interest rate policy in Europe and likely continued liberalization of Japan YCC supporting reduced foreign appetite for US debt.”

“How much higher yields can go in part relies on the accumulation of evidence that the economy and financial system can sustain higher rates,” the bank concludes, but “outside of a crisis-style recessionary environment, we do not see a strong argument for material re-rally in forwards out the curve.”

With this, BNP Paribas favors buying 1y5y5y mid-curve payer butterfly: “a complete convergence of 5y5y nominal rates to potential nominal growth (currently about 4.1% on our measure) would be consistent with a ~60bp move higher in yields” and the bank’ yield forecasts “imply a move of about half that magnitude, which is nonetheless consistent with a break higher from the prevailing range.”

Specifically, the bank likes expressing the view “via a 1y5y5y A/A+60/A+120 mid-curve payer butterfly targeting a 60bp rise in the 5y5y rate with potential for more than a 5 to 1 return on the initial premium paid.”

New structured notes

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

• Societe Generale sold a $10m 3y NC1 zero coupon callable (non-Formosa). The EMTN matures Jun 2026 and is callable annually starting Jun 2024. Lead N/A. Estimated IRR 5.95%. Announced Jun 29.

   

• Citigroup sold a $20m 5y NC3 zero coupon callable (non-Formosa). The EMTN matures Jun 2028 and is callable annually starting Jun 2026. Self-led. Estimated IRR 5.25%. Announced Jun 28.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jan 2027 NC2 that pays 4.8%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2028 NC2 that pays 4.8%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2030 NC2 that pays 5.15%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2033 NC2 that pays 5.35%. Domestic MTN.

   

• Morgan Stanley is working on a self-led fixed callable maturing Dec 2031 NC4 that pays 5%. Domestic MTN.

   

• Citigroup is working on a self-led step-up callable maturing Jul 2025 NC6m that pays 5.75% to Jul 2024 and 6% thereafter. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Aug 2024 NC6m that pays 6%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 5.65%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Jul 2033 NC18m that pays 5.5%. Domestic MTN.

   

• Citigroup is working on a self-led fixed callable maturing Jul 2030 NC3 that pays 5.15%. EMTN.  

   

• UBS is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 5.53%. EMTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Aug 2024 NC9m that pays 5.8%. GMTN.

    

• Toronto Dominion is working on a self-led step-up callable maturing Jul 2028 NC1 that pays 5.6% to Jul 2025, 6.5% to Jul 2027 and then pays 7% thereafter. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 6%. GMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 5.85%. GMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2027 NC1 that pays 5.5%. GMTN.

   

• Royal Bank of Canada is working on a self-led CMS non-inversion note maturing Jun 2033 NC1 that pays 8% for the first two years and then pays 8% as long as CMS2y/CMS30y is greater than zero. GMTN.

   

• Bank of Montreal is working on a fixed callable via BofA maturing Jul 2026 NC6m that pays 6%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Jul 2025 NC6m that pays 6%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 6%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Jul 2028 NC6m that pays 5.35%. CD format. Domestic.

   

• Societe Generale is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 6%. EMTN.  

   

• Societe Generale is working on a self-led fixed callable maturing Jul 2026 NC6m that pays 6%. EMTN.  

   

• Standard Chartered is working on a self-led fixed callable maturing Jul 2024 NC2wk that pays 6.57%. EMTN. Credit linked.