USD Vol: Vols tick down lower; Muted moves

Calm waters 5 Jun 2020
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Implieds are softening in modestly with activity and price action more muted to start the week. Barclays examines ULC richness and favors 1y1y shorts

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  • Vols tick down lower; Muted moves

  • Barclays stay short 1y1y; Curtailed vol supply factor 

  • New structured notes

     

    Vols tick down lower; Muted moves

    Treasuries are bear flattening today, with yields up to 6bps higher, led by the 2y. The $42bn 2y auction came 0.2bps through the 1pm bid side, drawing a rate of 4.823%. The vol surface is seeing a minor softening of 0.2 to 1 normal, with 6m expiries in the belly leading the modest pressure.

     

    Looking at recent price action, one source described an underlying bid to the upper left “as there are always bids in 1y1y and 2y2y,” he opined, and is suggestive of program buying and thus making the upper left “sticky.”

     

    As for the week ahead, sources wonder, what if any surprises are ahead - The market got PMIs this morning with not much impact and the FOMC meeting mid-week is expected to deliver the expected 25bps hike. That said, one source found that the “market tends not to believe whatever the Fed says.”

     

    Trading today has been limited in the ULC with only 3m2y trading at 109bps. Elsewhere has been relatively sparse. 1wk10y dealt at 118bps, 1m10y traded at 193bps, 2m10y traded at 278bps, 3m10y traded at 344bps and 342bps, according to the SDR.

     

    longer tail activity included possible switches of 1y25y versus 7y20y at 1143bps and 2213bps, respectively, and 3y30y versus 7y30y at 2050bps and 2774bps, respectively.

     

    In skew, a 4m10y 50bp each way risk reversal may have dealt at +4bps, 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.

     

     

    Barclays stay short 1y1y; Curtailed vol supply factor 

    Analysts at Barclays finds that “implied volatility, especially in the very top left of the vol surface continues to show signs of a high vol risk premium in the form of elevated implied/realized ratios.” Barclays thinks that the likely reason for this “is that the market still perceives tail risk in very short tenors despite them being anchored recently.”

     

    “Some of this may be due to the fact that vol supply from short tenor callables in the very top left of the vol surface has fallen quite sharply from the peak in April, with the pace of new callable issuance grinding to a halt in recent days,” the bank finds, Thus “the very top left of the vol surface is likely rich because the demand is still there but the supply has fallen drastically,” it surmises. 

     

    In addition, “while the recent rally in rates may increase the pace of calls, there may not be additional replacement supply given that bill yields in the 3m-1y area are well north of 5%, leading to less investor demand for short tenor callables,” Barclays suggests.

     

    Further, “to the extent callable issuance is happening, the average tenor is no longer in the 1y area, but seems to be extending further out the curve,” it highlights and “thus the vol overhang from in the 3m1y area should be falling.”

     

    Overall, Barclays finds that “1y1y implied vols are priced close to where vol has realized over the past month (despite some large surprises),” and the bank believes that “short vol positions in Fed sensitive forwards 1y1y should benefit from more anchoring and vol roll-down as the position ages, especially if structured so that they also benefit from forward rates rolling up to spot.”

     

    Thus, Barclays retain its bias to be short 1y1y vol as it believes it has “further room to decline,” and the bank’s favorite expression of this view “continues to be in the form of buying 5/5.5 payer spreads in 1y1y and being short low strike receivers.”

     

     

    New structured notes

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

     

    • Merrill Lynch sold a $25m floating rate Formosa. The EMTN matures Aug 2033 and pays O/N SOFR +145bps. Self-led. Announced Jul 20. Credit-linked.

       

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

       

    • Citigroup is working on a self-led step-up callable maturing Jul 2026 NC1 that pays 5% to Jul 2024, 5.25% to Jul 2025 and 5.5% thereafter. Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 4.3%.  EMTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Jul 2028 NC4 that pays 4.65%.  Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Oct 2028 NC5 that pays 5.5%.  Domestic MTN.

       

    • JP Morgan is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 5.8%.  Domestic MTN.

       

    • Credit Agricole is working on a self-led $15m fixed callable maturing Jul 2028 NC3 that pays 5.62%.  Domestic MTN.    

       

    • HSBC is working on a self-led step-up callable maturing Feb 2025 NC1 that pays 4.6% to Feb 2024, 4.65% to Aug 2024 and 4.7% thereafter. Eurodollar.

       

    • UBS is working on a self-led fixed callable maturing Jun 2026 NC1 that pays 5.54%. EMTN. Credit-linked.

       

    • UBS is working on a self-led fixed callable maturing Aug 2025 NC6m that pays 5.4%. EMTN.

       

    • UBS is working on a self-led fixed callable maturing Aug 2025 NC1 that pays 4.99%. EMTN.

       

    • UBS is working on a self-led fixed callable maturing Aug 2026 NC6m that pays 6%. EMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Jan 2025 callable Oct 2023 that pays 5.6%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Aug 2024 callable Apr 2024 that pays 5.75%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Oct 2024 callable Oct 2023 that pays 5.85%. GMTN.

       

    • Toronto Dominion is working on a self-led fixed callable maturing Jul 2028 NC1 that pays 5.75%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2038 NC5 that pays 5.45%. GMTN.

       

    • Royal Bank of Canada is working on a self-led fixed callable maturing Jul 2033 NC2 that pays 5.65%. GMTN.

       

    • Bank of Montreal is working on a self-led USD extendible with initial maturity Jan 2024 and then extendible to Jul 2026 that pays 5.95% to Jul 2024, then pays 6% to Jul 2025 and then pays 6.05% thereafter. Domestic MTN.  

       

    • Standard Chartered is working on a self-led $20m fixed callable maturing May 2024 NC1m that pays 7.47%. EMTN. Credit linked.

       

    • Standard Chartered is working on a self-led $20m fixed callable maturing Feb 2024 NC1m that pays 7.33%. EMTN. Credit linked.

       

    • Standard Chartered is working on a self-led $20m fixed callable maturing Sep 2023 NC1m that pays 5.66%. EMTN. Credit linked.

       

    • Standard Chartered is working on a self-led $20m fixed callable maturing Feb 2024 NC1m that pays 7.25%. EMTN. Credit linked.

       

    • Standard Chartered is working on a self-led $5m fixed callable maturing Nov 2023 NC1m that pays 7.43%. EMTN. Credit linked.

       

    • Jefferies is working on a self-led fixed callable maturing Jul 2026 NC1 that pays 6.5%. Domestic MTN.