USD Vol: Post-CPI plunge lower

Post-CPI plunge lower

Treasuries have built upon post-CPI gains with yields up to 17.6bps lower, led by the 3y maturity. The vol surface plunged following the tame CPI print and the subsequent UST rally, with 3m gamma dropping nearly 9.5 normals before seeing a rebound with 3m expiries now last around 2 to 6.5 normals lower on the day. Meanwhile 1m expiries have dropped around 8 to 20 normals, 1y expiries are down around 1.5 to 4 normals and long expiries are down roughly 1 to 2 normals on the day.

Sources see the Fed likely going 25bps for a final hike in two weeks and then staying pat and with the uncertainty over the Fed path being more assured in the wake of today’s moderate CPI print, vols have cascaded back in lower.

Trading activity saw 1y1y go through at 117bps and then back up at 119bps. Around the same time 1x2 CFS traded at 140bps and then down at 138bps, sources say. 1m10y traded at 209bps and 208bps, 6m2y versus 6m1y traded at 160bps and 73bps, respectively, 6m5y traded at 336bps in good size after CPI, then dealt at 335bps and 3m2y dealt at 110bps, according to the SDR.

Vega points saw more activity. 5y10y versus 1y10y dealt at 1366bps and 724bps, respectively, and then also dealt at 1353bps and 717bps, respectively, later in the session. 5y10y traded versus 10y10y at 1355bps and 1577bps, respectively, and 3y10y versus 7y10y traded at 1142bps and 1483bps, respectively, while also 5y10y versus 7y10y dealt at 1355bps and 1482bps, respectively, according to the SDR.  

In other activity, sources saw the 1y1y 1x2 wedge was bid today at 27bps after trading Monday at 30bps, while in risk reversals, some 3m10y 50bp each way risk reversals may have dealt at +3bps, 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.

Stay long gamma in short term – JP Morgan  

Analysts at JP Morgan find the move higher in implieds last week “not at all surprising” as they recently argued that “implieds would be biased higher in the near-term despite being at elevated levels as policy clarity remains elusive and markets remain in a state of heightened reactivity to new information and market liquidity remains poor.”

Indeed, the bank finds that the increase in implieds last Thursday “after the strong ADP data release, and the over 10bp change in yields, is just one example of these conditions.”

Looking ahead, JP Morgan maintains its bias for higher volatility in the near-term. For one, the bank’s fair value model “continues to point to higher implieds across the surface in the near term, with the exception of shorter expiry 2-year tails.” In addition, JP Morgan finds that “range of policy rate paths continues to remain wide, which can be seen in the implied distribution inferred from the pricing of calls and puts at various strikes of Dec '23 SOFR futures” as the markets continue “to price to scenarios involving significant easing as well as more hikes, with fairly comparable blend-weights.”

Overall, JP Morgan suggests the path of monetary policy “will remain foggy, until at least the July FOMC meeting, keeping implieds elevated.”

As for positioning, the bank continues to favor a long gamma bias via calendar spreads in 10y tails. To be sure, it notes the 6m10y and 1y10y implied volatility differential “has decreased significantly in the past month and has started to retrace back very recently.” Thus, it looks to buy delta hedged 6m10y straddles versus a vega-neutral amount of delta hedged 1y10y straddles “as an efficient way of constructing long gamma exposure.”

New structured notes

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

• IADB sold a $50m 20y NC5 zero coupon callable (non-Formosa). The EMTN matures Jul 2043 and is callable annually starting Jul 2029. Lead JPM. Estimated IRR 5.225%. Announced Jul 12.

   

• JP Morgan is working on a self-led CMS steepener maturing Jul 2026 NC1 that pays 8.5% for the first two years, then pays 10*(CMS2y/10y), floored at zero. EMTN.

   

• JP Morgan is working on a self-led CMS steepener maturing Jul 2025 NC1 that pays 6% for the first year, then pays 5*(CMS2y/10y), floored at 2%. EMTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2038 NC2 that pays 6.14%. Putable Oct 2023. EMTN.  

   

• Barclays Bank is working on a self-led fixed callable maturing Jul 2026 NC2 that pays 5.98%. EMTN.  

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2028 NC2 that pays 5.25%. Domestic MTN.  

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2033 NC2 that pays 5.5%. Domestic MTN.  

   

• Morgan Stanley is working on a self-led fixed callable maturing Jul 2038 NC2 that pays 5.75%. Domestic MTN.  

   

• Toronto Dominion is working on a self-led fixed callable maturing Jul 2027 NC1 that pays 6.15%. GMTN.

   

• Bank of Montreal is working on a self-led USD extendible with initial maturity Jul 2024 and then extendible to Jul 2028 that pays 6.5%. Domestic MTN.