Falling back from the highs
Euro implieds continued to retreat from the peaks of earlier this week as the Bund rallied over a point in a continuation of yesterday's post-US CPI data price action.
In euro vol, 3m10y declined by -1.4 to 97.2nvol having been marked above 102nvol at the start of this week. Elsewhere, the top left also moved lower, such as 1y1y down by -2.0 at 116.6 having been surged as high as 120nvol on the screens just a couple of sessions ago.
As for selling flows behind the latest decline in implieds, one dealer was unsure about the amount of interest, “The clients we generally speak to are not that involved in the market at the moment (during summer)... but possibly some hedge fund accounts could be interested," he agreed. "The carry (from selling vol) may be of interest,” he noted.
Elsewhere, another theme in recent sessions has been a pick-up in callable deals (see below). “Possibly the recent selloff (in rates) and spike in vol made coupons that bit more attractive,” a dealer felt.
In vega, most pieces were marked down by around -0.5nvol with 5y10y last -0.6 at 89.5nvol. “The moves have been more driven by gamma, rather than flows,” it was suggested.
Vol curve steepener - JP Morgan
Strategists at JP Morgan recommend entering a 2s/10s implied vol curve steepener via buying 3m10y straddles vs selling 3m2y straddles. It explains:
- “On valuations, 2s/10s implied volatility curve has recently flattened across tails and at around -1bp/day, we believe that favours volatility curve steepeners.
- “The vol curve steepener across tails (10y-2y) is a proxy to outright short gamma positions at the front end of the curve and offers a better risk reward.
- “The trade is expected to benefit from attractive positive carry; 10y swaps have been delivering around 1.2bp/day more than 2y swaps over the last month but are priced around 1bp/day lower.
- “Additionally, 10y implieds have exhibited a greater degree of resilience, especially in a decline as the top right of the volatility surface has been anecdotally supported by some structural demand of CMS caps in the 10y sector. Overall, we recommend 2s/10s volatility curve steepener across tails.”
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