USD Vol: Pre-FOMC implieds tick up, led by the ULC

The vol surface is a bit higher, with the ULC leading the up to 3 normal move. BNP Paribas examines the increasing impact of jobless claims.

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  • Pre-FOMC implieds tick up, led by the ULC

  • Growing impact of jobless claims on volatility – BNP Paribas  

  • New structured notes


    Pre-FOMC implieds tick up, led by the ULC

    Treasuries are ebbing lower, led by the belly of the curve, with yields last 2.5 to 4.5bps higher on the day. The vol surface ticked up a touch, but are off the morning levels, with 3m gamma last around 1.3 to 3 normals higher, led by the left side. 1y expiries are around 0.5 to 2 normals higher, also led by the left. Longer expiries are roughly unchanged.


    Earlier, the $43bn 5y auction came at the bid side of the 1pm level, drawing a rate of 4.17%. Lower indirects (64.4%) where partially offset by higher directs (22.1%), leaving primary dealers with a higher 13.49% allocation versus last month. With tomorrow being FOMC, sources are not reading too much into the price action, with desks likely tweaking positions and covering unwanted risk.


    Coming out of the FOMC, although the 25bps is priced in to a 98.9% probability in the futures markets, sources note that the language and emphasis by the Fed and Powell will be closely parsed.  


    Interbank activity in the ULC saw 6m3y at 223bps, 1y1y at 116bps outright and likely versus 2y1y at 148bps, 1y2y at 218.5bps and 219bps, and 2y2y at 280bps likely versus 1y1y at 116.5bps, and early on, 1m2y versus 3m2y traded at 65bps and 110bps, respectively, according to the SDR.


    Further to the right, 1m5y dealt at 139bps and 139.5bps, 6m3y dealt at 224bps versus 6m5y at 328.5bps, 1m10y traded at 196bps, 6m10y traded at  495.5bps, and in a fly, 3m10y/6m10y/1y10y traded at 347bps, 495.5bps and 699bps, in longer expiries 15y10y traded at 1635bps, 1y20y traded at 1019bps, 2y5y traded at 588bps and 3y5y at 683bps (possibly a switch), according to the SDR.


    In CFS, a 6mx9m caplet dealt at 14.25bps and 14.5bps after trading at 14bps late last week.



    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.



    Growing impact of jobless claims on volatility – BNP Paribas

    Analysts at BNP Paribas find “jobless claims gaining in importance as inflation moderates” as officials “gauge whether additional tightening will be warranted.”


    Historically, “claims gave a leading signal ahead of the 1980, 1991 and 2001 downturns, and indicated a slowdown in 2019 ahead of the Fed’s rate cuts that year” and currently, “claims have risen sharply from trailing 12m lows, even though they remain at relatively low levels historically,” BNP Paribas points out.


    In turn “market reaction to claims data appears to be rising” as “an increased focus on weekly jobless claims appears to be playing out with a realized volatility impulse in recent months,” the bank finds. For example, “over the last two months, the average close-to-close realized move on the 2y UST has been 80% higher on jobless claims release days versus the average of all other trading sessions” and the average low-to high trading range of the 2y UST yield “has been 20% higher for claims days versus the average of all other trading days,” BNP Paribas highlights.


    Further, when adjusting for concurrent economic data releases on weekly claims days, BNP Paribas finds that “the trends hold” and “over the last two months, days when claims data was released exhibited a 2y UST average realized move more than 90% higher than the average of all other days.” while in the three months prior, “initial claims days were even less volatile on average than non-claims days at 33%.”


    Examining whether the initial reaction to jobless claims extended throughout the day, the bank finds that that this is mostly the case: “Over the last two months, the 2y UST yield either rose when claims surprised lower or fell when claims surprised higher 80% of the time” and “the first reaction by 2y UST yields continued throughout the day 80% of the time.”


    As of result of this analysis BNP Paribas believes the increasing impact of jobless claims on the rate market “will continue as the labor market softens, with initial and continuing claims an early warning signal.” In options markets, “it means that selling options expiring on claims days may be taking a little more expiry risk,” the bank finds, and further “long gamma hedgers may also consider being a little more patient, as the initial reaction to claims data has been following through and leading to outsized close-to close realized moves in the 2y UST.”



    New structured notes

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


    • Goldman Sachs is working on a self-led $20m floating callable maturing Aug 2033 NC5 that pays O/N SOFR +207bps. EMTN.


    • Ally Financial is working on a fixed callable via InspereX maturing Aug 2028 NC6m that pays 7.35%. Domestic MTN.