USD Vol: Gamma reverses back lower with UST rebound

Binary 7 Dec 2021
The vol surface is back lower vs. a backdrop of lower rates and illiquidity. The ULC is leading the cheapening. Barclays examines SDR trade themes.

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  • Gamma reverses back lower with UST rebound

  • Long vol bias; Mixed rate views – Barclays

  • New structured notes


    Gamma reverses back lower with UST rebound

    Treasuries have rebounded higher today, with yields dropping as much as 11.5bps, led by the 3y and 5y. While a data-driven catalyst for the buying today was lacking, sources highlight that the “student body” has swung back into buying mode after last week’s flush out lower.  The vol surface has similarly cheapened back lower as gamma points are 3 to 7 normals lower in 3m expiries, led by the left side, while further out, 1y expiries are down around 2 to 4 normals. Vega points are modestly lower by as much as 0.75 normal.


    “The market has a very short memory and as 1y1y hit local highs last week,” the levels seemed at odds since the previous highs were made against a backdrop of “a lot more uncertainty,” a source pointed out. Thus, the source believed that it makes sense for the ULC to drop back lower from those levels seen last week as “now is different” and the “Fed is likely only to go twice more” and maintain that level “for much longer.”


    Meanwhile liquidity remains a scarce commodity and moves in rates and vol are more exaggerated due to the lack of liquidity. For instance, vols are "gapping 1+ nvol trade by trade in what are usually liquid points," pointed out one trader. 


    In interbank activity, in the ULC, 1m2y dealt at 77bps, 3m2y traded at 122bps, and in a possible switch, 1y2y traded at 230bps while 2y2y traded at 292bps. In other possible switches, 6m2y traded at 172bps, possibly versus 1y3y at 323bps, and in another potential switch, 1y2y traded at 231bps versus 6m3y at 239bps, according to the SDR.


    Further out, 2y5y traded at 643bps and then down at 631bps and 1y7y traded at 594bps and then down at 591bps, possibly as two switches of 2y5y versus 1y7y. 1m10y traded at 233bps, 232bps and 234bps, and later in the session, 3m10y traded at 388bps, 6m5y traded at 356.5bps, 6m10y dealt at 545bps and 2y10y traded at 1005bps,, according to the SDR.


    In a wedge, 1y1y 1x2 CFS traded at a spread of 30bps on $1bn and was bid on at the time, sources say, and a 1y1y ATM versus 150bps payer may have dealt at 62.5bps and 12.75bps, respectively, while a 3m3y ATM versus 50bp low receiver may have dealt at 84bps versus 36bps, according to the SDR.  


    For USD 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.



    Long vol bias; Mixed rate views – Barclays

    Analysts at Barclays point out key themes emerging from USD swaption SDR data over the past two weeks ending June 30th.


    First Barclays finds that “investors continue to have a long vol bias, suggesting that vol bottomed in mid-June.” Although swaption volumes “have been declining over the past couple of weeks,” the bank finds that “the long vol bias appears to have persisted at slightly lower levels than June.” To be sure, Barlcyas highlights that “vol buying has tended to focus on the top right” and the bank’s estimate of systematic selling in gamma “has diminished ahead of payroll data.”


    Barclays also notes “a slight uptick in vol buying on the LHS in both short and longer expiries.”


    Second, the bank points out that “little conviction on rate direction being expressed through swaption structures” as “both bullish and bearish structures are being reported in SDR.” For example it cites bearish structures such as “1y10y payer spread struck at ATM+100 vs ATM+200 (positioning for rising term premium) as well as 1y1y payer ladder struck at ATM vs ATM+100 vs ATM+200 (positioning for a moderate selloff).


    On the other hand, bullish trades or “receiver-based structures include 3m2y receiver spreads struck at ATM-25 vs ATM-75 (positioning for a moderate dovish shift from the Fed)” while “low-strike structures such as 1y1y receiver spreads struck at 2% vs 1% were also reported.”


    Lastly, Barclays finds that “volatility term structure trades in intermediate expiries remain popular” as “calendar spreads and triangles in intermediate expiries on the vol surface continue to be reported,” including option triangles such as 1y1y vs 1y2y vs 2y1y through straddles, as well as calendar spreads such as 6m30y vs 1y30y with ATM+/-50 strangles.


    New structured notes

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


    • Bank of America is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 6.0%. Domestic MTN.  


    • Bank of America is working on a self-led step-up callable maturing Jul 2038 NC3 that pays 5.75% to Jul 2030, 6% to Jul 2034 and 6.5% thereafter. Domestic MTN.


    • Barclays is working on a self-led $500m floating callable maturing Dec 2023 NC1m that pays O/N SOFR +7bps. Private placement.


    • Barclays is working on a self-led $10m fixed callable maturing Jul 2036 NC2 that pays 5.98%. EMTN.


    • BNP Paribas is working on a self-led fixed callable maturing Jul 2028 NC3 that pays 8.03%. Credit linked to Ford Motor. EMTN.


    • Credit Agricole is working on a self-led $225m fixed callable maturing Jul 2028 NC1 that pays 6.2%. EMTN.


    • HSBC is working on a self-led $16.77m step-up callable maturing Jan 2025 NC1 that pays 4.4% to Jan 2024, 4.45% to Jul 2024 and 4.5% thereafter. Eurodollar.


    • Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 6%. GMTN.


    • Jefferies is working on a self-led fixed callable maturing Jul 2025 NC1 that pays 6.5%. Domestic MTN.