USD Vol: Vols firm with higher realizeds in UST selloff

Vols firm with higher realizeds in UST selloff  

Treasuries flipped lower, with higher initial jobless claims fingered as the culprit, in a belly led move that sees yields last 6 to 11bps higher on the day. The vol surface has moved higher on the back of the higher realized move, sources judge. “It didn’t take much for vols to move higher,” noted one source. The right side outperformed while the left side has stayed relatively supported at the same time, sources say.

3m expiries are last up to 3.25 normals higher on the day, led by the right. 1y expiries are 1.5 to 2 normals firmer and longer expiries are up 0.5 to 1.5 normals higher on the day. One source remarked that the price action these days is such that that when “rates selloff, vol seems better bid.”

Trading activity today included vega trades this morning such as 5y10y at 1340bp, 10y20y at 2394bps and was bid on at the time, sources say, and 10y15y traded at 2015bps. This afternoon, 2y10y versus 3y10y dealt at 954bps and 1117bps, respectively, while 2y10y dealt outright at 962bps.

As for the upper left, this morning saw 1m1y traded at 26bps, 1y2y go through in good size at 220bps, and in switches, 2y2y versus 1y4y traded at 282bps and 385bps, respectively. Also a 3m1y versus 3m30y switch traded at 45.4bps and 600bps, with the 600bps bid hit at the time, sources say.

Some Bermudan trading was also seen today, with for example a 5y NC1 trading at 174bps over the 5y swap rate, that to one trader indicated resilient upper left side bidding interest. Also, a 2y1y versus 3y NC6m Berm ATM -50bps traded at 150bps and 261bps, respectively, sources say. In CFS, a 2x3 ATM versus 200bps high traded twice, at 78bps for the ATM and then 26bps followed up 27bps on the 200bps high. Yesterday, 1x2 CFS traded actively at 139.5bps - possibly indicative of corporate Treasury interest to cover or go long ahead of the FOMC next week, one source suggested. Also today, some 6mx9m caplet dealt at 14bps, sources say. 

In skew, a 3m30y 50bp each way risk reversal traded today at +7bps, with the offer lifted, with the market prior at +3/+7bps. Thus, leading one source to remark that “payers are getting bid.”

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.

3m5y receiver ladder for gradual rates rally – Citigroup  

Analysts at Citigroup believe that “the continuing tug-of-war between data should keep the rate rally somewhat constrained in the near-term and possibly keep the Fed on rate pause longer than expected.”

Meanwhile the rate rally last week “brought yields back to the middle of their recent range, and implied vol has justifiably cheapened with yields no longer threatening to break out in either direction,” Citigroup argues, and the bank believes that this backdrop “should be negative for implied rates vol, and see room for vol to cheapen further after the last rate hike as it has historically been the case, including in the late 70s/early 80s.”

“Given the magnitude of the rate rally over the past week, which has been one of the most extreme in long-run history, we believe that it is reasonable for the pace of the repricing to moderate somewhat in the near-term” and it notes that historical data jives with this assessment. 

For example, comparing all the observed rolling 3-month changes in the 5y rate in the past 30 years against the observed 3-month changes only after the 5y rate has already just rallied by 43bps or more the prior week (43bps is the magnitude of the rally seen last week, Citigroup “clearly” sees that the subsequent 3-month rally “has been much more muted when rates have just experienced a significant repricing, with only two exceptions seen back during the 2008 financial crisis.”

As a result, Citigroup looks to own a costless short-dated receiver ladders “to position for a gradual rate rally while minimizing the downside risk in a rates sell-off in case inflation rebounds unexpectedly.” The bank notes that “the combination of relatively elevated rates vol and historically negative forward-spot rate roll provides an opportunity to own receiver ladders” and furthermore, “the rate rolls from forwards to spot are currently at their all-time historical lows, which would provide an additional cushion to the receiver ladder’s terminal breakeven.”

After an analysis of various structures, Citigroup sees the optimal structure in owning 3m5y ATMF/A-23/A-46 receiver ladder at net zero cost. “The trade’s terminal profit region is between 3%-3.69% and has a breakeven that was last reached back in September 2022 and is below the level where the 5y rate had rallied back in March on the regional bank concerns.” The bank sees the main risk to the trade “is a repeat of the banking stress along with a collapse in inflation data.”

New structured notes

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

• Standard Chartered sold a $50m 20y NC7 zero coupon callable (non-Formosa). The note matures Jul 2043, is callable from Jul 2030 and has an estimated IRR of 5.75%. Self-led and announced Jul 20. 

   

• Natixis sold a $50m 20y NC8 zero coupon callable (non-Formosa). The EMTN matures Jul 2043, is callable from Jul 2031 and has an estimated IRR of 5.58%. Self-led and announced Jul 19.

   

• Goldman Sachs is working on a self-led fixed callable maturing Jul 2033 NC18m that pays 5.75%. Domestic MTN.

   

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

   

• Goldman Sachs is working on a self-led fixed callable maturing Jul 2026 NC6m that pays 6%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Jul 2030 NC2 that pays 5.4%. Domestic MTN.

   

• JP Morgan is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 5.5%.  Domestic MTN.   

   

• JP Morgan is working on a self-led fixed callable maturing Jul 2025 NC6m that pays 5.55%.  Domestic MTN.   

   

• Bank of America is working on a self-led fixed callable maturing Jul 2035 NC18m that pays 5.5%.  Domestic MTN.    

   

• Barclays is working on a self-led fixed callable maturing Aug 2033 NC3 that pays 5.75%. GMTN.

   

• Barclays is working on a self-led fixed callable maturing Jul 2024 NC6m that pays 5.25%. EMTN.

   

• BNP Paribas is working on a self-led fixed callable maturing Jul 2028 NC3 that pays 6.5%.  Credit linked to Louis Dreyfus Co. EMTN.

   

• Credit Agricole is working on a self-led fixed callable maturing Jul 2027 NC1 that pays 5.8%. EMTN.

   

• UBS is working on a self-led fixed callable maturing Jul 2025 NC1 that pays 5.85%. EMTN.

   

• UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 5.85%. EMTN.

   

• UBS is working on a self-led SOFR ranger maturing Aug 2024 NC1m that pays 6.5% as long as a given SOFR Index is between 5-6% to Aug 2023, then pays 6.5% as long as a given SOFR Index is between 4.5-6%. EMTN.

   

• Toronto Dominion is working on a self-led fixed callable maturing Jul 2028 NC2 that pays 5.5%. Domestic MTN.

   

• Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2028 NC2 that pays 5.5%. GMTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Jul 2025 NC6m that pays 5.75%. Domestic MTN.

   

• Bank of Montreal is working on a self-led fixed callable maturing Aug 2026 NC6m that pays 5.8%. Domestic MTN.

   

• Wells Fargo is working on a self-led step-up callable maturing Jul 2026 NC1 that pays 5.6% to Jul 2024, 5.8% to Jul 2025 and 6.1% thereafter. Domestic MTN.

   

• Wells Fargo is working on a self-led fixed callable maturing Jul 2027 NC1 that pays 5.75%. Domestic MTN.  

   

• Wells Fargo is working on a self-led fixed callable maturing Jul 2033 NC2 that pays 5.7%. Domestic MTN.